United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended March 31,September 30, 2018

OR

For the transition period from                    to                    

Commission File Number 001-34044

REAL GOODS SOLAR, INC.

(Exact name of registrant as specified in its charter)

110 16^th STREET, SUITE 300

DENVER, COLORADO 80202

(Address of principal executive offices)

(303) 222-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

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

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

REAL GOODS SOLAR, INC.

FORM 10-Q

INDEX

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, including statements regarding the Company’s results of operations and financial positions, and the Company’s business and financial strategies. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they provide our current beliefs, expectations, assumptions and forecasts about future events, and include statements regarding our future results of operations and financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “anticipate,” “believe,” “plan,” “estimate,” “expect,” “future,” “intend,” “strategy,” “likely,” “seek,” “may,” “will” and similar expressions as they relate to us are intended to identify such forward-looking statements. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements.

Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, without limitation, the following: our history of operating losses; our ability to implement our revenue growth strategy;strategy achieve its target level of sales, generate cash flow from operations, and achieve break-even and better results; our ability to achieve profitability; our ability to generate breakeven cash flow to fund our operations; our success in implementing our plans to increase future sales, and installations and revenue; rules, regulations and policies pertaining to electricity pricing and technical interconnection of customer-owned electricity generation such as net energy metering; the continuation and level of government subsidies and incentives for solar energy; existing and new regulations impacting solar installations including electric codes; an increase in our cost of materials that could arise as a result of the Section 201 tariff on imported crystalline silicon photovoltaic cells and modules; future shortages in supplies for solar energy systems; our failure to timely or accurately complete financing paperwork on behalf of customers; the adoption and general demand for solar energy; the impact of a drop in the price of conventional energy on demand for solar energy systems; seasonality of customer demand and adverse weather conditions inhibiting our ability to install solar energy systems; changing and updating technologies and the issues presented by these new technologies related to customer demand and our product offering; geographic concentration of revenue from the sale of solar energy systems in Hawaii, California and east coast states; non-compliance with or loss or suspension of licenses required for installation of solar energy systems; loss of key personnel and ability to attract necessary personnel; our failure to accurately predict future warranty claims; adverse outcomes arising from litigation and legal disputes to which we may be subject from time to time; the outcome of a dispute with a customer of our former Commercial segment related to remedial work; the possibility that our insurance carrier seeks reimbursement of legal expenses up to $1.5 million in connection with a now closed Securities and Exchange Commission (the “SEC”) investigation related to our July 2014 private placement; our ability to continue to obtain services and components from suppliers, installers and other vendors; disruption of our supply chain from equipment manufacturers and potential shortages of components for solar energy systems; factors impacting the timely installation of solar energy systems; competition; costs associated with safety and construction risks; continued access to competitive third party financiers to finance customer solar installations; increasesthe ability to obtain requisite international product certification of POWERHOUSE™ 3.0; our ability to successfully and timely commercialize POWERHOUSE™ 3.0 during 2019; in interest ratesfuture years achieve market share; our ability to satisfy the conditions and tightening credit markets;our obligations under the POWERHOUSE™ 3.0 license agreement; our ability to manage supply chain in order to have production levels and pricing of the POWERHOUSE™ 3.0 shingles to be competitive; our ability to successfully expand its operations and employees and realize profitable revenue growth from the sale and installation of POWERHOUSE™ 3.0, and to the extent, anticipated; RGS Energy’s ability to realize revenue from sales of POWERHOUSE™ arising from the California Energy Commissions’ mandate for solar systems with new home building commencing in 2020; our ability to realize revenue from written reservations for initial POWERHOUSE™ deliveries; our ability to obtain UL certificationfuture written reservations for POWERHOUSE™ deliveries; and RGS Energy’s ability to obtain future purchase orders for POWERHOUSE™ deliveries; competition in the built-in photovoltaic solar system business; our ability to successfully and timely expand its POWERHOUSE™ 3.0 business outside of the United States; foreign exchange risks associated with the POWERHOUSE™ 3.0 business; intellectual property infringement claims related to the POWERHOUSE™ 3.0 business; the performance of the Solar Division; the adequacy of, and commercialize it;access to, capital necessary to implement its revenue growth strategy; RGS Energy’s ability to satisfy the conditions to receive additional funds underlying the investor promissory notes received in the 2018 convertible note offering; RGS Energy’s ability to satisfy equity conditions and other covenants in the transaction documents for the offering of convertible notes due April 9, 2019; whether RGS Energy will receive any proceeds from exercise of common stock warrants; rules, regulations and policies pertaining to electricity pricing and technical interconnection of customer-owned electricity generation such as net energy metering; the continuation and level of government and utility incentives for solar energy; changes in general economic, business and political conditions, including tariffs on imported solar cells and changes in the financial markets; the impact on future hypothetical earnings per share of future employee incentive compensation by cash bonuses and stock option awards; future cancellations of our backlog; our ability to meet customer expectations; risks and liabilities associated with placing employees and technicians in our customers’ homes and businesses; product liability claims; future data security breaches, or our inability to protect personally identifiable information or other information about our customers; failure to comply with the director independence standards of the SEC and the Nasdaq Capital Market; our inability to maintain effective disclosure controls and procedures and internal control over financial reporting; the volatile market price of our Class A common stock; the dilutive effect of the conversion of our outstanding convertible notes and exercise of outstanding warrants or other issuances and our ability to obtain additional financing in the future; our ability to obtain shareholder approval to reduce the conversion price of our convertible notes due April 9, 2019 and the exercise price of the Series Q warrants below the market price of our Class A common stock; our ability to receive cash payments under the Investor Notes;Notes (as defined below); our ability to pay the balance due at maturity of our convertible notes due April 9, 2019 if the holders thereof do not convert them or are not forced to convert; the dilutive effect of future issuances of stock, options, warrants or other securities and the effect on the market price of our Class A common stock; the low likelihood that we will pay any cash dividends on our Class A common stock for the foreseeable future; compliance with public reporting requirements; anti-takeover provisions in our organizational documents; the probability of the occurrence and potential magnitude of cybersecurity incidents; the adequacy of preventative actions taken to reduce cybersecurity risks and the associated costs, including, if appropriate, discussing the limits of the company’s ability to prevent or mitigate certain cybersecurity risks; the terms of some of our outstanding securities and transaction documents entered into in connection with past offerings restrict our ability to enter into certain transactions or obtain financing, and could result in our paying premiums or penalties to the holders of some of our outstanding securities; the disruptive effect and costs associated with threatened or commenced proxy contests; our ability to meet The Nasdaq Capital Market continued listing requirements; and such other factors as discussed throughout Part I, Item 1A, Risk Factors and Part II, Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 10-K”). and Part I, Item 2, Management’s Discussion and Analysis of Financial Conditions and Results of Operations and Part II, Item 1A, Risk Factors included in our Quarterly Reports on Form 10-Q for the period ended March 31, 2018, June 30, 2018 and this report.

Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.otherwise, except as required by applicable law.

PART I – FINANCIAL INFORMATION

REAL GOODS SOLAR, INC.

Condensed Consolidated Balance Sheets (unaudited)

See accompanying notes.

REAL GOODS SOLAR, INC.

Condensed Consolidated Statements of Operations (unaudited)

See accompanying notes.

REAL GOODS SOLAR, INC.

Condensed Consolidated Statement of Changes in Shareholders’ Equity (unaudited)

See accompanying notes.

REAL GOODS SOLAR, INC.

Condensed Consolidated Statements of Cash Flows (unaudited)

See accompanying notes.

Notes to Condensed Consolidated Financial Statements

1. Organization, Nature of Operations, and Principles of Consolidation

Real Goods Solar, Inc. (the “Company” or “RGS”) is a residential and small business commercial solar energy engineering, procurement, and construction firm.

These consolidated financial statements have been prepared on the going concern basis, which presumes the realization of assets and the settlement of liabilities in the normal course of operations. The application of the going concern basis is dependent upon the Company achieving profitable operations to generate sufficient cash flows to fund continued operations, or, in the absence of adequate cash flows from operations, obtaining additional financing. The Company has reported losses from operations for the three months and nine months ended March 31,September 30, 2018 and 2017 and has an accumulated deficit of $204.8$231 million at March 31,September 30, 2018. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Management continues to reviewThe Company is the licensee of POWERHOUSE™, an in-roof solar shingle using technology developed by the Dow Chemical Company that it believes will improve results of operations in order to identify additional strategies designed toand generate cash flow, improveflow. The Company received product certification from UL on November 2, 2018 and has begun to manufacture the Company's financial position, and enableshingles. To commercialize POWERHOUSE™, the timely discharge of the Company's obligations. If management is unable to identify sources of additional cash flow in the short term, it may be required to further reduce or limit operations.Company has received approximately $15 million since April 9, 2018.

Principles of Consolidation

We have prepared our unaudited interim condensed consolidated financial statements included herein pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to these rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, the unaudited interim financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material respects, our condensed consolidated financial position as of March 31,September 30, 2018, the interim results of operations for the three months and nine months ended March 31,September 30, 2018 and 2017, and cash flows for the threenine months ended March 31,September 30, 2018 and 2017. These interim statements have not been audited. The balance sheet as of December 31, 2017 was derived from our audited consolidated financial statements included in our 2017 10-K. The interim condensed consolidated financial statements contained herein should be read in conjunction with our audited financial statements, including the notes thereto, for the year ended December 31, 2017.

Discontinued Operations

During 2014, we committed to a plan to sell certain contracts and rights comprising our large commercial installations business, otherwise known as our former Commercial segment. At the same time, we determined not to enter into further large commercial installation contracts in the mainland United States. Most contracts in process at December 31, 2014 were substantially completed during 2015 and remaining work was completed during 2016. We report this business as a discontinued operation, separate from our continuing operations. See Note 12.13. Discontinued Operations.

Liquidity and Financial Resources Update

The Company has experienced recurring operating losses and negative cash flow from operations which have necessitated: (i) developing plans to grow revenue to generate positive cash flow and (ii) raising additional capital. No assurances can be given that the Company will be successful with its plans to grow revenue for profitable operations or, if necessary, raisingraise additional capital. See Note 6, Shareholders6. Shareholders’ Equity Note 7, Convertible Debt and Note 13, Subsequent Events7. Convertible Debt for transactions raising capital during the first quarter of 2018.

The Company’s plans to grow revenue are:

During February 2018, the Company completed a strategic realignment to scale back the Company’s residential solar homeowner business. While the Company has made progress during 2017 in growing solar sales and backlog, growth has not met initial expectations. The realignment reduced the number of outside sales personnel. The Company plans to maintain the areas of core competencies meeting expectations, such as its e-sales call center and commercial sales organization.

Until the Company is successful in implementing its plans to increase revenue for profitable operations, the Company expects to have a cash outflow from operating activities. The Company expects to obtain UL certification for POWERHOUSE™ 3.0 in 2018 and, if it determines to proceed at that time with the commercialization of POWERHOUSE™, the Companyinitially expects to have cash outflow from operating activities for commercialization of POWERHOUSE™, 3.0 and prepayments with supply chain manufacturers and working capital as sales of the product commence. Additionally, the Company wouldwill be required to make the remaining “Initial License” payment of $2 million, which wouldwill be recorded as a cash outflow in investing activities.

To provide funds to grow the Company’s revenue,commercialize POWERHOUSE™ 3.0, on March 30, 2018, the Company entered into the Securities Purchase Agreement for the 2018 Note Offering (as defined and further discussed in Note 7,7. Convertible Debt). The 2018 Note Offering may result in grossCash proceeds of $10.0 million, before placement agent fees and other expenses associated with the transaction. At the closing on April 9, 2018received by the Company received $5 million of the gross proceeds and Investor Notes (as defined and further discussed in Note 7, Convertible Debt) in an aggregate amount of $5 million secured byincluding hypothetical cash and/or securities held in investor accounts. Investors are requiredreceipts related specifically to prepay the Investor Notes as they convert their Series B Notes (as defined and further discussed in Note 7, Convertible Debt) issued in the 2018 Note Offering are summarized below:

The expected activity above reflects:

* The Company receiving cash of $3.4 million from the Investor Notes and upon satisfactionwarrants (Note 7. Convertible Debt).

* The noteholders converting shares represented by Additional Amount under the 2018 Notes (Note 7. Convertible Debt) into Class A common stock at the reset price of Equity Conditions and certain other conditions, upon$0.3067

The Company has accessto cash from exercise of common stock warrants issued in transactions arranged prior to the occurrence of a specified mandatory prepayment event. The 2018 Notes (as defined and further discussed in Note 7,7. Convertible Debt) are convertible into Class A common stock and mature on April 9, 2019. If the 2018 Notes have not been fully converted into shares. The maximum cash from exercise of Class A common stock at maturity, the Company would seek to refinance any remaining balance at that time from: (i) negotiations with the holders of the 2018 Notes, (ii) funds obtained in a public or private offering of securities, or (iii) funds received upon common stock warrant exercises including after reducing the exercise price ofother common stock warrants to induce conversion.is the mathematical result of the number of warrant shares times the respective exercise price per share. The majority of these common stock warrants have exercise prices at or below $3.10 per share and would result in cash receipts of $19.2 million if all investors elect cash exercises (not cashless exercises). No assurances can be given that should a balance remain on the 2018 Notes at maturity the Companyinvestors will be successful in meeting the obligation under the 2018 Notes.exercise their remaining common stock warrants.

If theThe Company proceeds with commercialization of POWERHOUSE™ 3.0,believes it will require additional capital which could be met from the Investor Notes. In the event capital from the Investor Notes are not received by the Company, the Company would seek to obtainhas arranged for the capital from other transactions such as a private or public offering of securities, and common stock warrant exercises including the Company reducing the exercise price of common stock warrants to induce conversion.commercialize POWERHOUSE™ 3.0. No assurances can be given that should the Company determine to proceed with commercialization ofwill successfully commercialize POWERHOUSE™ 3.0, it will have available to it the additional capital necessary, either from the Investor Notes or an alternative transaction.3.0.

2. Significant Accounting Policies

The Company made no changes to its significant accounting policies during the threenine months ended March 31,September 30, 2018, with the exception of the adoption ofhowever it implemented ASC 606 as discussed in Note 3. Revenue.

Revenue and accounted for the recognition of derivative liabilities and warrant liabilities related to the 2018 Note Offering as discussed in Note 7. Convertible Debt.

Reclassification of Prior Year Presentation

Common Stock Warrants

Certain prior year amounts have been reclassifiedThe Company accounts for consistencycommon stock warrants in accordance with the current period presentation. These reclassifications had no effectapplicable accounting guidance provided in Financial Accounting Standards Board (“FASB”) ASC 480,Liabilities – Distinguishing Liabilities from Equity, as either liabilities or as equity instruments depending on the reported resultsspecific terms of operations. During the second quarterwarrant agreement. Certain of 2017, the Company’s warrants are accounted for as liabilities due to provisions either allowing the warrant holder to request redemption, at the intrinsic value of the warrant, upon a change of control, event of default or failure to deliver shares. The Company concluded that it was appropriate to classify itemsclassifies these warrant liabilities with maturities of five years on the Condensed Consolidated Balance Sheet as long-term liabilities. They are revalued at each balance sheet date after their initial issuance with changes in the statement of operationsvalue recorded in earnings. The Company used a Monte Carlo pricing model to conform with operating metrics reported to investors and the manner in which management evaluates financial performance and to classify warranty liability separately as current and non-currentvalue these warrant liabilities. Accordingly, the Company revised the classification of certain items to report items in the statement of operations and balance sheet. These changes in classification did not change the previously reported operating income (loss) in the statement of operations, or cash generated (used) from operations in the statement of cash flows, or operating income (loss) for any business segment.

Derivatives

The 2018 Notes contain conversion features which have been accounted for in accordance with FASB ASC 815,Derivatives and Hedging. The conversion options are embedded within the 2018 Notes but have been separated as (i) their economic characteristics and risks do not clearly and closely relate to the 2018 Notes (ii) the 2018 Notes are not remeasured at fair value and (iii) a separate instrument with the same terms as the conversion options would be considered a derivative. Additionally, the conversion options meet all the criteria of a derivative in that they have an underlying (conversion price) and notional amount (potential shares), the conversion options do not require an initial net investment and the conversion options provide for net settlement. The conversion options have been initially measured at fair value and are revalued at each balance sheet date after their initial issuance with changes in the value recorded in earnings. The Company used a Lattice pricing model to value these derivative liabilities. The Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. The Company classifies these derivative liabilities with maturities of one year on the Condensed Consolidated Balance Sheet as short-term liabilities. When the conversion option has been exercised, for accounting purposes both liabilities (i.e., the debt host and the separated derivative liability) will be subject to extinguishment accounting. As such, a gain or loss upon extinguishment of the two liabilities equal to the difference between the recorded value of the liabilities and the fair value of the consideration issued to extinguish them will be recorded.

Recently Issued Accounting Standards

ASU 2018-13

In August 2018, FASB issued Accounting Standards Update No. 2018-13 (“ASU 2018-13”),Fair Value Measurement (Topic 820):Disclosure Framework—Changes to the Disclosure: Requirements for Fair Value Measurement. The amendments in the Update remove, modify and add certain disclosure requirements for Fair Value Measurement. Effective in fiscal years beginning after December 15, 2019 the Company will no longer have to disclose the valuation processes for Level 3 fair value measurements. Early adoption is permitted, and the Company will assess the impact of ASU 2018-13 on any assets or liabilities within the scope of ASC 820.

ASU 2018-11

In July 2018, FASB issued Accounting Standards Update No. 2018-11 (“ASU 2018-11”),Leases (Topic 842): Targeted Improvements.The amendments in this Update provide entities with an additional (and optional) transition method to adopt the new leases standard. Additionally, the amendments in this Update provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606). The Company is currently in the process of accumulating and evaluating all the necessary information required to properly account for its lease portfolio under the new standard. Additionally, the Company is considering a lease management system to support the ongoing accounting requirements and is evaluating additional changes to its processes and internal controls to ensure it meets the standard’s reporting and disclosure requirements. The Company is still evaluating the full impact on its condensed consolidated financial statements and related disclosures.

ASU 2018-10

In July 2018, FASB issued Accounting Standards Update No. 2018-10 (“ASU 2018-10”),Codification Improvements to Topic 842, Leases. The amendments in this update narrow aspects of the guidance issued in the amendments in Update 2016-02. The Company has previously disclosed that upon adoption of ASU 2016-02, right-of-use assets and lease liabilities will be recognized on the balance sheet in amounts that will be material. The Company will assess the impact of ASU 2018-10 in preparation for the adoption of ASU 2016-02.

ASU 2018-07

In June 2018, FASB issued Accounting Standards Update No. 2018-07 (“ASU 2018-07”),Compensation – Stock Compensation (Topic 718) – Improvement to Nonemployee Share-Based Payment Accounting.The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered. The definition of the term grant date is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and conditions. Consistent with the accounting for employee share-based payment awards, an entity will consider the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions. Generally, the classification of equity-classified nonemployee share-based payment awards will continue to be subject to the requirements of Topic 718 unless modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing goods or services. This eliminates the requirement to reassess classification of such awards upon vesting. This amendment is effective for public entities for fiscal years beginning after December 15, 2018 including interim periods within that fiscal year. The Company will assess the impact of ASU 2018-07 on any nonemployee share-based payments made in the future.

ASU 2018-05

On March 13, 2018, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update No. 2018-05 (“ASU 2018-05”),Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which was issued to state the income tax accounting implications of the Tax Cuts and Jobs Act (“TCJA”). The guidance clarifies the measurement period timeframe, changes in subsequent reporting periods and reporting requirements as a result of the TCJA. The measurement period begins in the period that includes the TCJA’s enactment date which was December 22, 2017 and as a result the Company has reflected the impact of this ASU on the tax provision and deferred tax calculation as of December 31, 2017.

ASU 2017-11

On July 13, 2017, the FASB issued Accounting Standards Update No. 2017-11 (“ASU 2017-11”),Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company has elected to early adopt this update. If the Down Round Provision is triggered, the Company will assessrecognize the impactvalue of ASU 2017-11 on any derivative instruments entered intothe effect as a dividend and a reduction to income available to common shareholders in the future.basic EPS calculation. The Company will disclose when the Down Round Provision has been triggered and its effects.

ASU 2017-042016-09

On January 26, 2017,In March 2016, the FinancialFASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, Standards Board (“FASB”) issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”),Intangibles – Goodwillwhich amends ASC 718 and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, which was issuedincludes provisions intended to simplify various provisions related to how share-based payments are accounted for and presented in the accounting for goodwill impairment. Thisfinancial statements. ASU removes Step 22016-09 eliminates the previous requirement to gross up the statement of cash flows between financing and operating to reflect the goodwill impairment test, which requires a hypothetical purchase price allocation. Impairmentimpact of windfall tax benefits has been eliminated. Instead, all tax related cash flows resulting from share-based payments will now be reported as operating activities in the amount by which a reporting unit’s carrying value exceeds its fair value, notstatement of cash flows. Additionally, the previous practice of classifying cash outflows related to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The standardan employee’s minimum statutory tax withholding as operating is no longer available. Instead, all such payments should be classified as financing. ASU 2016-09 is effective for financial statements issuedpublic business entities for fiscal yearsannual reporting periods beginning after December 15, 2019. Early adoption is permitted for2016, and interim or annual goodwill impairment tests performed after January 1, 2017. The Company is assessingperiods within those reporting periods. Due to the impact of ASU 2017-04 on its consolidated financial statements.

ASU 2016-20

On December 21, 2016, the FASB issued Accounting Standards Update No. 2016-20 (“ASU 2016-20”)2018 Incentive Plan (defined in Note 8. Share-Based Compensation),Technical Corrections and Improvements to Topic 606,Revenue from Contracts with Customers. This ASU provides technical corrections and improvements to Topic 606. This ASU this guidance is effective for the Company on January 1, 2018, which coincides withcurrent period however, there is no impact to the effective datestatement of ASU 2014-09 (as defined below). The Company has adopted this ASU effective January 1, 2018.

cash flows.

ASU 2016-02

On February 25, 2016, the FASB issued Accounting Standards Update No.ASU 2016-02, (“ASU 2016-02”),Leases (Topic 842),which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods therein. The Company currently expects that upon adoptionwill assess the impact of ASU 2016-02 right-of-use assets and lease liabilities will be recognized on the balance sheet in amounts that will be material.

ASU 2014-09

On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), which created Topic 606, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance.

In August 2015, the FASB issued Accounting Standards Update No. 2015-14,Revenue from Contracts with Customers – Deferral of the Effective Date, which defers the effective date of ASU 2014-09 one year. ASU 2014-09, as deferred by ASU 2015-14, will be effective for the first interim period within annual reporting periods beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company has adopted this ASU as of January 1, 2018 as discussed in Note 3.any leases.

3. Revenue

Effective January 1, 2018, the Company has adopted “ASC 606 –Revenue Fromfrom Contracts with Customers” related to revenue recognition. Under the standard, revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five-step model to achieve that principle. In addition, the standard requires disclosures to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company has elected to adopt the modified retrospective method for transitioning this accounting standard which requires that the cumulative effect of applying the revenue standard to existing contracts be recorded as an adjustment to retained earnings. Per our analysis performed as of the prior year ended December 31, 2017 no adjustments were required. For the threenine months ended March 31,September 30, 2018, the adoption of ASC 606 has resulted in the following changes in significant accounting policies:

Deferred Revenue

When we receivethe Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, we recordit records deferred revenue, which represents a contract liability. We recognizeThe Company recognizes deferred revenue as net sales after we have transferred control of the goods or servicesit has satisfied its performance obligations to the customer and all revenue recognition criteria are met.

Revenue Recognition – Installation of photovoltaic modules (“PV”) solar systems

WeThe Company generally recognizerecognizes revenue for installation of PV solar systems at a point in time (“performance obligation”) following the transfer of control to the customer which typically occurs when installers have completed an installation of the PV solar system. Although the ASC 606 is generally applied to a single contract with a customer, a portfolio approach may be acceptable if an entity reasonably expects that the effect of applying a portfolio approach to a group of contracts or group of performance obligations would not differ materially from considering each contract or performance obligation separately. The Company uses standard contract templates to initiate sales with customers which may vary based on customer type. As such, applying the portfolio approach to each type of customer contract would not differ materially from considering each contract on a standalone basis. The Company has used the portfolio approach in theirits analysis and determined that each project started during the threenine months ended March 31,September 30, 2018 contains one performance obligation.

Each project’s transaction price is included within the contract and although there is only one performance obligation, certain complexities could exist which impact the transaction price. Specific to solarized programs, wherein the Company has a scalable price per watt to the homeowner based on the number of participating homes in the community, the Company may credit homeowners of previously executed contract. Any credits to homeowners on previously executed contracts are treated as adjustments to the transaction price via change order forms. For solarized program incentives, the Company uses the “most likely amount” method in determining any adjustments to the transaction price due to certainty of the credit amount prior to completion of the project. The Company has also considered financing components on projects started during the threenine months ended March 31,September 30, 2018 and elected the use of a practical expedient where an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised service to the customer and when the customer pays for that good or service will be one year or less. All receivables from projects entered into during the current quarter are expected to be received within one year from project completion and no adjustments to the transactions prices were made.

Under ASC 606, the Company is required to recognize as an asset the incremental costs of obtaining a contract with a customer if those costs are expected to be recovered. The Company does incur selling and marketing costs and sales commissions that otherwise would not have been incurred if the contract had not been obtained however, these costs are not recoverable from the customer and are expensed as incurred.

The Company may enter into contracts/projects in which control of the PV solar systems transfers to the customer over time. As of March 31,September 30, 2018, no such project exists however, iftwo contracts satisfied the requirement of control transferring over time.

If control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation. The method utilized by the Company takesto measure the progress towards completion requires judgment and is based on such a project in the future,products and services provided. The Company utilizes the Company will determine whether an input or output method is most appropriate to recognize revenue in a pattern that reflectsmeasure the progress of its contracts because it best depicts the transfer of assets to the customer which incurs as materials are consumed by the project. The input method measures the progress towards completion based on the ratio of costs incurred to date (“actual cost”) to the total estimated costs (“budget”) at completion of performance obligation. Revenue, including estimated fees, are recorded proportionally as costs are incurred. Costs to fulfill include materials, labor and/or subcontractors’ costs, and other direct costs. Indirect costs and costs to procure the panels, inverters, and other system miscellaneous costs needed to satisfy the performance obligation are excluded since the customer does not gain control of the promised good or servicethose items until delivered to the customer.site. Including the costs of those items would overstate the extent of our performance.

If a contract is separated into multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on a budget vs actual ratio at each performance obligation. The Company does not sell contracts that have multiple performance obligations as PV systems are not functional until completely installed. More frequently, the Company sells a customized customer specific solution, which use the expected cost plus a profit margin to calculate the selling price at each performance obligation.

Revenue Recognition – Operations & Maintenance

WeThe Company generally recognizerecognizes revenue for standard, recurring commercial operations and maintenance services over time as customers receive and consume the benefits of such services, which typically include corrective maintenance, data hosting or energy/deck monitoring services for a period of time.period. These services are treated as stand-ready performance obligations and are satisfied evenly over the length of the agreement, so the Company has elected a time-based method to measure progress and recorded revenue using a straight-line method.

Revenue Recognition – Service & Warranty

Warranties for workmanship and roof penetration are included within each contract. These warranties cannot be purchased separately from the related services, are intended to safeguard the customer against workmanship defects and does not provide any incremental service to the customer. It is necessary for the Company to perform the specified tasks to provide assurance that the final product complies with agreed-upon specifications and likely do not give rise to a separate performance obligation. The Company will continue to account for any related warranties in accordance with ASC 460-10 and record an accrual for potential warranty costs at the completion of a project. Any services provided to a customer outside of warranties such as system inspections are recognized upon completion of the service.

Adoption of the standardsstandard related to revenue recognition had no impact to cash from or used in operating, financing, or investing on our consolidated cash flows statements. Refer to Note 11.12. Segment Information for further information, includingdisaggregated revenue by segment.disclosures.

4. Property and Equipment

Property and equipment, stated at lower of cost, or estimated fair value, consistsconsisted of the following as of March 31September 30, 2018 and December 31, 2017 respectively:

5. Commitments and Contingencies

The Company leases office and warehouse space through operating leases. Some of thethese leases have renewal clauses, which range from one month to five years.

The Company leases vehicles for certain field personnel through operating leases. Leases range up to fivefour years with varying termination dates through 2021.

The following schedule represents the annual future minimum payments of all leases as of March 31,September 30, 2018:

The Company incurred office and warehouse rent expense of $0.2 million and automobile lease expense of $0.1 million for the three months ended March 31,September 30, 2018 and $0.5 million and $0.2 million for the nine months ended September 30, 2018.

The Company is subject to risks and uncertainties in the normal course of business, including legal proceedings; governmental regulation, such as the interpretation of tax and labor laws; and the seasonal nature of its business due to weather-related factors. The Company has accrued a liability for probable and estimable costs incurred with respect to identified risks and uncertainties, based upon the facts and circumstances currently available.

From time to time, the Company may be involved in legal proceedingsavailable, that are considered to be in the normal course of business.both probable and estimable.

On February 16, 2017, Alpha Capital Anstalt, an investor in the Company’s February 6, 2017 public offering of common stock and warrants, filed a lawsuit against Roth Capital Partners, LLC, the Company’s investment banking firm in the offering, and the Company in U.S. District Court for the Southern District of New York. Alpha’s lawsuit alleges that the registration statement for the February 6, 2017 offering contained material misstatements or omissions and that the Company had breached contractual obligations owed to Alpha. Alpha seeks unspecified monetary damages, rescission and other unspecified relief in the lawsuit. The Company disputes Alpha’s allegations and intends to vigorously defend itself in the lawsuit. Under local court rules, the Company filed a letter motion seeking permission to file a motion to dismiss the claims related to the alleged misstatements and omissions in the complaint. On May 12, 2017, Alpha filed an amended complaint removing the securities and fraud-related claims and leaving only breach of contract claims against the Company. Because the Company has been unwilling to entertain settlement discussions, Alpha has recently deposed members of the Company and the Company’s legal team that represented the Company in the offering. The discovery period of the suit has ended and the Company filed a motion for summary judgment. On April 25, 2018, the district court granted the Company’s motion for summary judgment in part, and dismissed a portion of Alpha’s breach of contract claim. The district court directed the parties to prepare a pretrial order with respect to the remaining portions of the breach of contract claim. Separately, the district court granted Roth’s motion for summary judgment in its entirety, dismissing Roth from the case. Finally, the district court denied Alpha’s motion for summary judgment in its entirety

On September 29, 2017 (the “Effective Date”), The Dow Chemical Company (“Dow”) awarded the Company a world-wide exclusive license for the POWERHOUSE™ in-roof solar shingle (the “License”). Under terms of the License, RGS has agreed to a license fee of $3 million, of which $1 million was paid in connection with the Effective Date and the remaining $2 million will become a liability in the future upon obtaining UL certification and payable within 30 days thereafter.

On January 2, 2018, the Company entered into a Cooperation Agreement (the “Cooperation Agreement”) with Iroquois Capital Management LLC, Iroquois Master Fund LTD, Iroquois Capital Investment Group LLC, Richard Abbe and Kimberly Page (collectively, “Iroquois Capital”), wherein Iroquois Capital has agreed to (i) immediately terminate, and cease any and all solicitation and other efforts with respect to, the solicitation of proxies in opposition to the Company’s proposals for the 2017 annual meeting of shareholders, (ii) withdraw (and not resubmit) Iroquois’ proxy statement in opposition to the Company’s proposals for the 2017 annual meeting of shareholders, and (iii) promptly notify the staff of the SEC in writing that it is terminating the solicitation of proxies in opposition to the Company’s proposals for the 2017 annual meeting of shareholders. Pursuant to the Cooperation Agreement, the Company issued to Iroquois Master Fund LTD and Iroquois Capital Investment Group LLC, 456,000 and 144,000 unregistered and restricted shares of Class A common stock respectively as reimbursement for expenses incurred in connection with the 2017 annual meeting of shareholders and the negotiation, execution and effectuation of the Cooperation Agreement.

The Company expects to resolve a dispute with a customer of the former Commercial segment wherein the customer alleged that the Company had not completed agreed-upon remedial work to remedy alleged deficiencies. The customer notified the Company that it intends to perform such work at the Company’s expense using a third-party contractor. In addition, the customer demanded an aggregate of approximately $0.4 million as liquidated damages under the terms of the project contract. To avoid the costs of arbitration, obtain a release of approximately $0.3 million held in escrow related to this matter, and receive a release of all future obligation or liability, whether based on warranty, contract, or otherwise, the Company agreed to a complete settlement with all parties and increased its liability for this matter by approximately $0.1 million during the quarter.

6. Shareholders’ Equity

January 2018 Offering

On January 4, 2018, the Company closed a registered offering and concurrent private placement (“January 2018 Offering”) with one institutional and accredited investor in which the Company issued and sold to the Investor (i) 800,000 shares of Class A common stock, (ii) a prepaid Series P Warrantwarrant to purchase 800,000 shares of Class A common stock, and (iii) a Series O Warrantwarrant to purchase 1,600,000 shares of Class A common stock pursuant to the terms of the Securities Purchase Agreement, dated as of January 2, 2018, between the Company and the investor. The investor paid $1.15 per share of Class A common stock and $1.14 per share of Class A common stock underlying the Series P Warrantwarrant for aggregate gross proceeds of approximately $1.8 million. The Company received net proceeds of approximately $1.5 million at the closing.

The Series O Warrantwarrant is exercisable at any time starting six months after issuance and will remain exercisable for a period of five years thereafter at an initial exercise price of $1.47 per share, subject to adjustments for stock splits and similar events. The Series P Warrantwarrant is exercisable immediately after issuance and for a period of five years thereafter at an initial exercise price of $1.15 per share, of which $1.14 was paid at the closing with $0.01 per share payable upon exercise. On January 4, 2018, the investor paid $0.01 per share of Class A common stock to exercise the Series P Warrant.warrant.

2018 Convertible Note Offering

In connection with the issuance of the 2018 Note Offering, described in Note 7. Convertible Debt, the Companyissued $10.75 million in principal and original issue discount of the 2018 Notes and Series Q warrants exercisable into 9,126,984 shares of Class A common stock. At the closing of that transaction, the Company also sold warrants to the Placement Agents to purchase 730,159 shares of Class A common stock. See Footnote 1. Organization, Nature of Operations, and Principals of Consolidation for a rollforward of cash, principal and additional amounts of notes and share converted since issuance of the note through October 31, 2018.

Option Exercises, 2018 Convertible Note Conversions and Warrant Exercises

During the threenine months ended March 31,September 30, 2018 and 2017, the Company did not issue anyissued stock options nor issue any shares of its Class A common stock to employees upon the exercise of stock options.as discussed in Note 8. Share-Based Compensation. During the threenine months ended March 31,September 30, 2018, the Company issued 800,000 shares of its Class A common stock uponfor the exercise of prepaid Series P warrants attributable tofrom the January 2018 Offering.Offering and 46,839,921 shares for the conversion of the 2018 Notes and exercise of Series Q warrants.

At March 31,September 30, 2018, the Company had the following shares of Class A common stock reserved for future issuance:

7. Convertible Debt

2018 Convertible Note Offering

On March 30, 2018, the Company entered into a Securities Purchase Agreement with two unaffiliated institutional and accredited investors for a private placement (the "2018 Note Offering") of up to $10.75 million in principal amount and $10 million funding amount (reflecting $0.75 million of original issue discount) of Senior Convertible Notes (the "2018 Notes"), and Series Q Warrantswarrants (the “Series Q Warrants”) to purchase 9,126,984 shares of Class A Common Stock.

On April 9, 2018, see Note 13, Subsequent Events, the Company closed the 2018 Note Offering. The 2018 Note Offering may result in gross proceeds of $10.0 million, before placement agent fees and other expenses associated with the transaction. At the closing on April 9, 2018, the Company received $5 million of the gross proceeds and two secured promissory notes from each investor, in a combined aggregate amount of $5 million (each, an “Investor Note”), secured by cash and/or securities held in investor accounts.

The Company issued two Series A senior convertible notes (the “Series A Notes”) and two Series B senior secured convertible notes (the “Series B Notes”) in the transaction. The aggregate principal amount of the Series A Notes is $5.75 million and the Series B Notes is $5 million. All of the aggregate principal amount of the Series B Notes will constitute Restricted Principal (as defined in the Series B Notes). If an investor prepays any amount under such investor’s Investor Note, an equal amount of the Restricted Principal becomes unrestricted principal under such investor’s Series B Note. In lieu of initially receiving any original issue discount on the Series B Notes, the Series B Notes will accrue an “Additional OID Amount” (as defined in the Series B Notes) based upon the portion of the principal of the Series B Notes that becomes unrestricted from time to time, pro rata, which, in the aggregate would result in up to $0.75 million of Additional OID Amount payable under the Series B Notes if all of the principal under the Series B Notes becomes unrestricted.

The Company will not be required to amortize the 2018 Notes. All amounts owed under the 2018 Notes will mature and come due on April 9, 2019.

The 2018 Notes do not incur interest other than upon the occurrence of an event of default, in which case the 2018 Notes bear interest at 18% per year.

The 2018 Notes are convertible at any time, at the option of the holder, into shares of the Company’s Class A common stock at a conversion price.price equal to $0.3067. The initial fixed conversion price is $1.26 per share (which was above the closing bid price of our Class A common stock immediately before executing the Securities Purchase Agreement; the conversion price was increased from $1.2405 to $1.26 in the Amendments (as defined and further described in Note 13, Subsequent Events)), subject to reduction under certain circumstances as well as adjustment for stock splits, stock dividends and similar events.

The Securities Purchase Agreement requires the Company to hold a shareholders’ meeting before June 30, 2018 to seek approval of the issuance of shares of Class A Common Stock upon conversion of the 2018 Notes and exercise of the Series Q Warrants at conversion and exercise prices below the market price of its Class A common stock at the time of entering into the Securities Purchase Agreement, in compliance with Nasdaq Marketplace Rules. If, despite the Company’s reasonable best efforts such shareholder approval is not obtained at such shareholders’ meeting, the Company is obligated to hold recurring shareholders’ meeting until such shareholder approval is obtained. There can be no assurance that the Company will be successful in obtaining such shareholder approval.

If the Company receives such shareholder approval, the conversion price of the 2018 Notes and exercise price of the Series Q Warrants would be subject to potential reduction and resets in the future, for example, upon the future issuance of securities (e.g. full-ratchet anti-dilution protection) and the occurrence of certain events. In addition, if the Company receives such shareholder approval, following an event of default, holders of 2018 Note would be permitted to convert their 2018 Notesremained unchanged at an “Alternate Conversion Price” and at a 125% premium in an “Alternate Conversions” (each term, as defined in the 2018 Notes). The Company may at any time, subject to Nasdaq’s approval and with the prior written consent of the Required Holders (as defined in the Securities Purchase Agreement), reduce the conversion price of the 2018 Notes and exercise price of the Series Q Warrants to any amount and for any period of time deemed appropriate by its board of directors after obtaining such shareholder approval. Some of the provisions providing for reduction and reset of the conversion price of the 2018 Notes and exercise price of the Series Q Warrants are subject to a floor price, such that the adjusted conversion price or exercise price, as applicable, can never be below $0.194.

The Company will have the right to require mandatory conversion of the 2018 Notes if the volume-weighted average price of its Class A common stock for 10 consecutive trading days exceeds 200% of the conversion price, subject to certain “Equity Conditions” (as defined in the 2018 Notes). One of the equity conditions is that the Company has obtained the shareholder approval discussed above. The Company also has the right to redeem all, but not less than all, 2018 Notes for cash at 120% or 125% (depending on when it occurs) of the amount outstanding, subject to certain Equity Conditions. A holder of a 2018 Note may require use to redeem such note for cash at a 125% premium in connection with a transaction that results in a “Change of Control” (as defined in the 2018 Notes) and upon the occurrence of an event of default.

The terms of the 2018 Notes prohibits the Company from entering into a “fundamental transaction” (as defined in the 2018 Notes) unless the successor entity, which must be a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market (as defined in the 2018 Notes), assumes all of the Company’s obligations under the 2018 Notes and the other transaction documents in a written agreement approved by each 2018 Note holder. The definition of “fundamental transactions” includes, but is not limited to, mergers, a sale of all or substantially all of the Company’s assets, certain tender offers and other transactions that result in a change of control.

The 2018 Notes contain customary events of default, the occurrence of which triggers default interest and causes a failure of Equity Conditions, which may mean that the Company will be unable to force mandatory conversion of the 2018 Notes and that investors may not be required to prepay the Investor Notes under a mandatory prepayment event.$0.3223.

The 2018 Notes contain negative and affirmative covenants, including a requirement that the Company on a quarterly basis has available cash of at least $0.75 million.See Notes 1. Organization, Nature of Operations, and Principles of Consolidation, 2. Significant Accounting Policies and 9. Fair Value Measurements for additional information regarding the 2018 Note Offering.

8. Share-Based Compensation

Each investor may voluntarily prepay such investor’s Investor Note, in whole or in part, without premium or penalty at any time. The Investor Notes are also subjectOn June 21, 2018, Company shareholders approved the Real Goods Solar 2018 Long-Term Incentive Plan (“2018 Incentive Plan”) which allows the Company to mandatory prepayment, in whole or in part, upon the occurrence of (i) conversion of Restricted Principal under an investor’s Series B Note, and (ii) on the 45th day after the earlierissue up to occur of (A) the first date on which the SEC declares effective one or more registration statements registering the resale of the shares of1,300,000 Class A common stock underlyingCommon Stock shares. Employees or individuals who perform services for the 2018 Notes and the Series Q Warrants, and (B) the first date on which all of such shares of Class A common stockCompany are eligible to be resold byparticipate in the holders pursuant2018 Incentive Plan, which terminates upon the earlier of a board resolution terminating the 2018 Incentive Plan or ten years after the effective date of June 21, 2018. All outstanding options are non-qualified and are generally granted with an exercise price equal to Rule 144 promulgated under the Securities Act, subject to (1) certain Equity Conditions, (2) a requirement that the average volume weighted averageclosing market price of the Class A commonCompany’s stock exceedon the date of the grant. Under the 2018 Incentive Plan, the Company granted non-qualified stock options (“2018 Options”) with an explicit requisite service period of 2.78 years and a specified amount,maximum contractual term of seven years from the Effective Date. On the last day of each calendar quarter occurring after the Effective Date, the 2018 Options will vest at 8.3% contingent on continuous employment. The 2018 Options are classified as equity and (3) that no event of default is then existing and continuing.

Atmeasured using the closing“fair-value-based method” with share-based compensation expense recognized in the income statement on a straight-line basis over the requisite service for the entire award. The Company uses a Black-Scholes pricing model to estimate the value of the 2018 Note Offering,Options as of the effective date and will account for forfeitures when they occur.

The table below presents a summary of the Company’s option activity for the nine months ended September 30, 2018 and twelve months ended December 31, 2017:

During the nine months ended September 30, 2018, the Company entered into a Registration Rights Agreement withgranted 1,140,000 stock options and cancelled four stock options versus zero grants of stock options and two cancellations of stock options during the purchaser ofnine months ended September 30, 2017. Total share-based compensation expense recognized was $0.1 million and $0.02 million during the 2018 Notes under which it is required to file an initial registration statement with the SEC covering the resale of the shares of Class A common stock issuable pursuant to the 2018 Notes and the Series Q Warrants and to use the Company’s reasonable best efforts to have that initial registration statement declared effective within specified deadlines. The Company will be subject to certain monetary penalties, as set forth in the Registration Rights Agreement, if it fails to meet specified filing deadlines, effectiveness deadlines, maintenance requirements, and/or current public information requirements under the Registration Rights Agreement. The Company filed the required registration statement with the SEC on April 27,three months ended September 30, 2018 and 2017 and $0.2 million and $0.2 million during the SEC declarednine months ended September 30, 2018 and 2017, respectively.

9. Fair Value Measurements

The following tables present the registration statement effective on May 4, 2018.fair values of derivative instruments included in our consolidated balance sheets as of September 30, 2018 and 2017 (in thousands):

8. Fair Value MeasurementsThe Effect of Derivative Instrument on the Statement of Operations

for the Nine Months Ended September 30, 2018 and 2017

The Company accounts for Series Q warrants in accordance with ASC 480. The Series Q warrants are accounted for as liabilities due to provisions in the warrant allowing the warrant holder to request redemption, upon a change of control, failure to timely deliver shares of Class A common stock upon exercise or default. The Company classifies these warrant liabilities on the Condensed Consolidated Balance Sheet as long-term liabilities, which are revalued at each balance sheet date subsequent to their initial issuance. The Company used a Monte Carlo pricing model to value these warrant liabilities. The Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions.

The following tables summarize the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:

For the Company’s Level 3 measures, which represent common stockSeries Q warrants and the 2018 Notes Conversion Options, fair value is based on a Monte Carlo model and Lattice pricing model, that isrespectively. The models are based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The Company used a market approach to valuingvalue these derivative liabilities.

The following table shows the reconciliation from the beginning to the ending balance for the Company’s common stock warrant liability and embedded derivative liability measured at fair value on a recurring basis using significant unobservable inputs (i.e. Level 3) for the period ended March 31,September 30, 2018:

2018 Notes Derivative Liability

9. Share-Based CompensationThe fair value of the 2018 Notes derivative liabilities was derived using a Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The assumptions used on April 9, 2018, June 30, 2018 and September 30, 2018 to value the derivative liabilities are as follows:

Common Stock Warrants

DuringThe fair value of Series Q Warrants was derived using a Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the threeCompany to develop its own assumptions. The assumptions used on April 9, 2018, June 30, 2018 and September 30, 2018 to value the common stock warrant liabilities are as follows:

2018 Options

The determination of the estimated fair value of the 2018 Options using the Black-Scholes option-pricing model was affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatilities were based on a value calculated using the historical stock price volatility. Expected life was based on the specific vesting terms of the option and anticipated changes to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model was based on U.S. Treasury zero-coupon securities with remaining terms similar to the expected term on the options. RGS does not anticipate paying any cash dividends on its Class A common stock in the foreseeable future and, therefore, an expected dividend yield of zero was used in the option valuation model. The assumptions used to value to 2018 Options as of September 30, 2018 are as follows:

10. Goodwill Impairment

The Company performed its annual test of goodwill as of June 30, 2018, and based on the results of this test, the Company determined that the fair value of the goodwill no longer exceeded the carrying amount. The fair value was determined using a discounted cash flow valuation technique and resulted in an impairment of goodwill of $1.3 million during the nine months ended March 31, 2018, the Company did not grant any stock options and cancelled one stock option versus zero grants of stock options and cancellations of 23 stock options during the three months ended March 31, 2017. Substantially all stock options vest at 2% per month for the 50 months beginning with the first day of the eleventh month after date of grant.September 30, 2018.

Total share-based compensation expense recognized was $0 and $0.2 million during both the three months ended March 31, 2018 and 2017.

10.11. Net Income (Loss) Per Share

Basic net income (loss) per share excludes any dilutive effects of options, warrants or our senior secured convertible notes (the “2016 Notes”) due on April 1, 2019.2019 (the “2016 Notes”). The Company computes basic net income (loss) per share using the weighted average number of shares of its Class A common stock outstanding during the period. The Company computes diluted net income (loss) per share using the weighted average number of shares of its Class A common stock and common stock equivalents outstanding during the period. The Company excluded common stock equivalents of 7.516.8 million and 6.5 million for the three months ended March 31,September 30, 2018 and 2017, respectively, and 46.2 million and 6.5 million for the nine months ended September 30, 2018 and 2017, respectively, from the computation of diluted net loss per share because their effect was antidilutive.

11.12. Segment Information

The Company operates as four reportable segments: (1) Residential – the installation of solar energy systems for homeowners, including lease financing thereof, and small business commercial in the continental U.S.; (2) Sunetric – the installation of solar energy systems for both homeowners and business owners (commercial) in Hawaii; (3) POWERHOUSE™ – the manufacturing and sale of solar shingles; and (4) Other – corporate operations.Corporate. The Company discontinued its former large commercial segment and it is presented as discontinued operations.

Financial information for the Company’s segments and a reconciliation of the total of the reportable segments’ loss from operations to the Company’s consolidated net loss are as follows:

The following is a reconciliation of reportable segments’ assets to the Company’s consolidated total assets. The OtherCorporate segment includes certain unallocated corporate amounts.

12.13. Discontinued Operations

The following is a reconciliation of the major line items constituting pretax income of discontinued operations to the after-tax gainloss on discontinued operations that are presented in the condensed consolidated statements of operations as indicated:

The following is a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations to the total assets and liabilities of the discontinued operations presented separately in the condensed consolidated balance sheets as indicated: