United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 110-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017March 31, 2018
OR
| ¨ | 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 001-34044
REAL GOODS SOLAR, INC.
(Exact name of registrant as specified in its charter)
| COLORADO | 26-1851813 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
110 16th 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.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x | |||
| Emerging growth company | ¨ | |||||
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:
Class | Outstanding at | |
| Class A Common Stock ($.0001 par value) |
EXPLANATORY NOTE
On August 9, 2017, Real Goods Solar, Inc. (the “Company”) filed its Quarterly Report on Form 10-Q for the period ended June 30, 2017. As a result of a miscommunication between the Company and its auditors, the Company inadvertently filed the Form 10-Q before the Company’s independent public accounting firm had completed its review of the interim financials contained in the Form 10-Q. The Company’s independent public accounting firm has since completed its review and no changes to the Form 10-Q were required. The Company is filing this Amendment No. 1 to (i) provide signature pages and certifications to the Form 10-Q that are dated after completion of the auditors’ review, (ii) provide a review report by the Company’s independent public accounting firm and a letter regarding unaudited interim financial information from the Company’s independent public accounting firm as Exhibit 15.1 (solely as a result of the disclosure in this explanatory note), (iii) refile Exhibit 10.2 to include Appendix A, which was inadvertently omitted at the time of the original filing of the Form 10-Q, and (iv) revise the exhibit indices in the Form 10-Q accordingly. No other modifications to the Form 10-Q are being made by this Amendment No. 1. The Company is filing this Amendment No. 1 before the due date for the Form 10-Q. Other than as set forth in this explanatory note, this Amendment No. 1 speaks as of the original filing date, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the Form 10-Q.
REAL GOODS SOLAR, INC.
FORM 10-Q
INDEX
| 2 |
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.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; our history of operating losses; 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; restrictions on certain transactions and potential premiums and penalties under our outstanding 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 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; existing and new regulations impacting solar installations including electric codes; delays or cancellations for system installations where revenue is recognized on a percentage-of-completion basis; 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, loss of key personnel and ability to attract necessary personnel;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; our failure to accurately predict future warranty claims; 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 U.S. 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; increases in interest rates and tightening credit markets; our ability to obtain UL certification of POWERHOUSE™ and commercialize it; 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 U.S. Securities and Exchange CommissionSEC 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; possibilitythe dilutive effect of future dilutivethe conversion of our outstanding convertible notes and exercise of outstanding warrants or other issuances of securities and its impact on our ability to obtain additional financing;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; 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 terms of some of our outstanding warrants to purchase Class A common stocksecurities and securities purchase agreementstransaction documents entered into in connection with past offerings which limitrestrict our ability to enter into certain transactions or obtain financing, and which could result in our paying premiums or penalties to the holders of some of our outstanding Senior Secured Convertible Notes due April 1, 2019 (the “Notes”)securities; the disruptive effect and warrants; an increase incosts associated with threatened or commenced proxy contests; our cost of materials that could arise if the United States imposes trade remedies on imported crystalline silicon photovoltaic cells and modules;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, 2016 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 Report on Form 10-Q for the period ended March 31, 2017 and this report.(“2017 10-K”).
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.
| 3 |
PART I – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Condensed Consolidated Balance Sheets (unaudited)
| (in thousands, except share data) | June 30, 2017 | December 31, 2016 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 9,745 | $ | 2,940 | ||||
| Restricted cash | — | 173 | ||||||
| Accounts receivable, net | 1,990 | 3,002 | ||||||
| Inventory, net | 1,185 | 1,502 | ||||||
| Deferred costs on uncompleted contracts | 314 | 398 | ||||||
| Other current assets | 1,612 | 931 | ||||||
| Current assets of discontinued operations | 1,415 | 909 | ||||||
| Total current assets | 16,261 | 9,855 | ||||||
| Property and equipment, net | 774 | 620 | ||||||
| Goodwill | 1,338 | 1,338 | ||||||
| Net investment in sales-type leases and other assets | 1,479 | 1,308 | ||||||
| Noncurrent assets of discontinued operations | 605 | 1,252 | ||||||
| Total assets | $ | 20,457 | $ | 14,373 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Line of credit | $ | — | $ | 663 | ||||
| Convertible debt, net of deferred cost and pre-installment of $0 and $298 | 1 | 124 | ||||||
| Accounts payable | 547 | 2,019 | ||||||
| Accrued liabilities | 1,422 | 1,362 | ||||||
| Billings in excess of costs on uncompleted contracts | — | 107 | ||||||
| Derivative liabilities | — | 46 | ||||||
| Deferred revenue and other current liabilities | 815 | 1,033 | ||||||
| Current liabilities of discontinued operations | 733 | 921 | ||||||
| Total current liabilities | 3,518 | 6,275 | ||||||
| Other liabilities | 2,224 | 2,222 | ||||||
| Derivative liabilities | 53 | 137 | ||||||
| Noncurrent liabilities of discontinued operations | 758 | 761 | ||||||
| Total liabilities | 6,553 | 9,395 | ||||||
| Commitments and contingencies (Note 4) | ||||||||
| Shareholders’ equity: | ||||||||
| Class A common stock, $.0001 par value, 150,000,000 shares authorized, 7,480,906 and 1,183,151 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively | 8 | 8 | ||||||
| Additional paid-in capital | 204,742 | 187,752 | ||||||
| Accumulated deficit | (190,846 | ) | (182,782 | ) | ||||
| Total shareholders’ equity | 13,904 | 4,978 | ||||||
| Total liabilities and shareholders’ equity | $ | 20,457 | $ | 14,373 | ||||
| March 31, | December 31, | |||||||
| (in thousands, except share and per share data) | 2018 | 2017 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 303 | $ | 1,170 | ||||
| Accounts receivable, net | 1,638 | 2,393 | ||||||
| Inventory, net | 1,689 | 1,950 | ||||||
| Deferred costs on uncompleted contracts | 666 | 615 | ||||||
| Other current assets | 1,247 | 1,264 | ||||||
| Current assets of discontinued operations | 1,080 | 1,242 | ||||||
| Total current assets | 6,623 | 8,634 | ||||||
| Property and equipment, net | 1,053 | 1,156 | ||||||
| POWERHOUSE™ license | 1,178 | 1,114 | ||||||
| Goodwill | 1,338 | 1,338 | ||||||
| Net investment in sales-type leases and other assets | 1,420 | 1,437 | ||||||
| Noncurrent assets of discontinued operations | 574 | 579 | ||||||
| Total assets | $ | 12,186 | $ | 14,258 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Convertible debt, net of deferred cost | $ | 1 | $ | 1 | ||||
| Accounts payable | 2,157 | 1,387 | ||||||
| Accrued liabilities | 1,335 | 1,441 | ||||||
| Deferred revenue and other current liabilities | 1,534 | 1,392 | ||||||
| Current liabilities of discontinued operations | 789 | 721 | ||||||
| Total current liabilities | 5,816 | 4,942 | ||||||
| Other liabilities | 2,240 | 2,329 | ||||||
| Derivative liabilities | 49 | 76 | ||||||
| Non-current liabilities of discontinued operations | 729 | 745 | ||||||
| Total liabilities | 8,834 | 8,092 | ||||||
| Commitments and contingencies (Note 5) | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, par value $.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding | - | - | ||||||
| Class A common stock, par value $.0001 per share; 150,000,000 shares authorized; 10,351,845 and 8,151,845 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively | 8 | 8 | ||||||
| Class B common stock, par value $.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding | - | - | ||||||
| Additional paid-in capital | 208,164 | 205,830 | ||||||
| Proxy contest consideration | - | 810 | ||||||
| Accumulated deficit | (204,820 | ) | (200,482 | ) | ||||
| Total shareholders’ equity | 3,352 | 6,166 | ||||||
| Total liabilities and shareholders’ equity | $ | 12,186 | $ | 14,258 | ||||
See accompanying notes.
| 4 |
Condensed Consolidated Statements of Operations (unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| (in thousands, except per share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Contract revenue: | ||||||||||||||||
| Sale and installation of solar energy systems | $ | 2,708 | $ | 4,750 | $ | 6,070 | $ | 9,553 | ||||||||
| Service | 277 | 133 | 568 | 270 | ||||||||||||
| Leasing, net | 12 | 14 | 25 | 28 | ||||||||||||
| Contract expenses: | ||||||||||||||||
| Installation of solar energy systems | 2,668 | 4,175 | 5,744 | 8,692 | ||||||||||||
| Service | 491 | 291 | 809 | 630 | ||||||||||||
| Customer acquisition | 1,329 | 618 | 2,251 | 1,416 | ||||||||||||
| Contract income (loss) | (1,491 | ) | (187 | ) | (2,141 | ) | (887 | ) | ||||||||
| Operating expense | 2,461 | 2,743 | 5,432 | 5,759 | ||||||||||||
| Litigation expense | 55 | — | 135 | 24 | ||||||||||||
| Operating loss | (4,007 | ) | (2,930 | ) | (7,708 | ) | (6,670 | ) | ||||||||
| Taxes | — | (27 | ) | — | (27 | ) | ||||||||||
| Derivative and other | 10 | (576 | ) | (368 | ) | (648 | ) | |||||||||
| Loss from continuing operations, net of tax | (3,997 | ) | (3,533 | ) | (8,076 | ) | (7,345 | ) | ||||||||
| Income (loss) from discontinued operations, net of tax | (33 | ) | 70 | 12 | 231 | |||||||||||
| Net loss | $ | (4,030 | ) | $ | (3,463 | ) | $ | (8,064 | ) | $ | (7,114 | ) | ||||
| Net income (loss) per share – basic and diluted: | ||||||||||||||||
| From continuing operations | $ | (0.53 | ) | $ | (165.90 | ) | $ | (1.32 | ) | $ | (349.50 | ) | ||||
| From discontinued operations | 0.00 | 3.30 | 0.00 | 11.10 | ||||||||||||
| Net loss per share – basic and diluted | $ | (0.53 | ) | $ | (162.60 | ) | $ | (1.32 | ) | $ | (338.40 | ) | ||||
| Weighted-average shares outstanding: | ||||||||||||||||
| Basic and diluted | 7,481 | 21 | 6,102 | 21 | ||||||||||||
| For the Three Months Ended March 31, | ||||||||
| (in thousands, except per share data) | 2018 | 2017 | ||||||
| Contract revenue: | ||||||||
| Sale and installation of solar energy systems | $ | 2,520 | $ | 3,357 | ||||
| Service | 287 | 292 | ||||||
| Leasing, net | 15 | 14 | ||||||
| Contract expenses: | ||||||||
| Installation of solar energy systems | 2,839 | 3,080 | ||||||
| Service | 393 | 313 | ||||||
| Customer acquisition | 1,191 | 974 | ||||||
| Contract loss | (1,601 | ) | (704 | ) | ||||
| Operating expense | 2,630 | 2,916 | ||||||
| Litigation | 117 | 80 | ||||||
| Operating loss | (4,348 | ) | (3,700 | ) | ||||
| Derivative and other | 31 | 107 | ||||||
| Debt accretion expense and loss on extinguishment | - | (486 | ) | |||||
| Loss from continuing operations, net of tax | (4,317 | ) | (4,079 | ) | ||||
| (Loss) Income from discontinued operations, net of tax | (21 | ) | 45 | |||||
| Net loss | $ | (4,338 | ) | $ | (4,034 | ) | ||
| Net loss per share – basic and diluted: | ||||||||
| From continuing operations | (0.42 | ) | (0.87 | ) | ||||
| From discontinued operations | - | 0.01 | ||||||
| Net loss per share – basic and diluted | $ | (0.42 | ) | $ | (0.86 | ) | ||
| Weighted-average shares outstanding: | ||||||||
| Basic and Diluted | 10,210 | 4,709 | ||||||
See accompanying notes.
6
| 5 |
Condensed Consolidated Statement of Changes in Shareholders’ Equity (unaudited)
| Class A Common Stock | Additional | Accumulated | Total Shareholders’ | |||||||||||||||||
| (in thousands, except share data) | Shares | Amount | Paid - in Capital | Deficit | Equity | |||||||||||||||
| Balances, January 1, 2017 | 1,183,151 | $ | 8 | $ | 187,752 | $ | (182,782 | ) | $ | 4,978 | ||||||||||
| Issuance of common stock and other equity changes related to compensation | — | — | 226 | — | 226 | |||||||||||||||
| Proceeds from common stock offering, net of costs | 6,110,000 | — | 16,029 | — | 16,029 | |||||||||||||||
| Fair value of shares issued for convertible notes and interest | 177,018 | 735 | 735 | |||||||||||||||||
| Fractional shares issued in connection with reverse split | 10,737 | — | — | — | — | |||||||||||||||
| Net loss | — | — | — | (8,064 | ) | (8,064 | ) | |||||||||||||
| Balances, June 30, 2017 | 7,480,906 | $ | 8 | $ | 204,742 | $ | (190,846 | ) | $ | 13,904 | ||||||||||
| Total | ||||||||||||||||||||
| Shareholders’ | ||||||||||||||||||||
| Class A Common Stock | Additional | Accumulated | Equity | |||||||||||||||||
| (in thousands, except share data) | Shares | Amount | Paid - in Capital | Deficit | (Deficit) | |||||||||||||||
| Balance, December 31, 2017 | 8,151,845 | $ | 8 | $ | 206,640 | $ | (200,482 | ) | $ | 6,166 | ||||||||||
| Proceeds from common stock offering and warrant exercises, net of costs | 1,600,000 | - | 1,524 | - | 1,524 | |||||||||||||||
| Common stock issued to settle proxy contest | 600,000 | - | - | - | - | |||||||||||||||
| Net Loss | - | - | - | (4,338 | ) | (4,338 | ) | |||||||||||||
| Balance, March 31, 2018 | 10,351,845 | $ | 8 | $ | 208,164 | $ | (204,820 | ) | $ | 3,352 | ||||||||||
See accompanying notes.
| 6 |
Condensed Consolidated Statements of Cash Flows (unaudited)
| For the Six Months Ended June 30, | ||||||||
| (in thousands except share data) | 2017 | 2016 | ||||||
| Operating activities | ||||||||
| Net loss | $ | (8,064 | ) | $ | (7,114 | ) | ||
| Gain from discontinued operations | 12 | 231 | ||||||
| Loss from continuing operations | (8,076 | ) | (7,345 | ) | ||||
| Adjustments to reconcile loss from continuing operations to net cash used in operating activities – continuing operations: | ||||||||
| Depreciation | 201 | 215 | ||||||
| Amortization of debt discount and issuance costs | — | 623 | ||||||
| Share-based compensation expense | 226 | 342 | ||||||
| Change in valuation of derivative liabilities and loss on debt extinguishment | 357 | (267 | ) | |||||
| Loss on sale of assets | 13 | 10 | ||||||
| Bad debt expense | 23 | 101 | ||||||
| Changes in operating assets and liabilities: | —— | |||||||
| Accounts receivable | 989 | 1,081 | ||||||
| Costs in excess of billings on uncompleted contracts | 8 | 571 | ||||||
| Inventory, net | 317 | 818 | ||||||
| Deferred costs on uncompleted contracts | 84 | 406 | ||||||
| Net investment in sales-type leases and other assets | (169 | ) | (127 | ) | ||||
| Other current assets | (689 | ) | (206 | ) | ||||
| Accounts payable | (1,472 | ) | (445 | ) | ||||
| Accrued liabilities | 185 | (470 | ) | |||||
| Billings in excess of costs on uncompleted contracts | (107 | ) | (662 | ) | ||||
| Deferred revenue and other current liabilities | (218 | ) | 19 | |||||
| Other liabilities | 2 | 8 | ||||||
| Net cash used in operating activities – continuing operations | (8,326 | ) | (5,328 | ) | ||||
| Net cash (used in) provided by operating activities – discontinued operations | (38 | ) | 213 | |||||
| Net cash used in operating activities | (8,364 | ) | (5,115 | ) | ||||
| Investing activities | ||||||||
| Purchase of property and equipment | (372 | ) | — | |||||
| Proceeds from sale of property and equipment | 2 | 9 | ||||||
| Net cash (used in) provided by investing activities | (370 | ) | 9 | |||||
| Financing activities | ||||||||
| Proceeds from warrant exercises, net of costs | — | 17 | ||||||
| Proceeds from convertible debt, net of costs and restricted cash | — | 1,533 | ||||||
| Restricted cash released upon conversion of debt | 173 | — | ||||||
| Proceeds from the issuance of common stock, net of costs | 16,029 | — | ||||||
| Principal payments on revolving line of credit | (663 | ) | (9,198 | ) | ||||
| Principal borrowings on revolving line of credit | — | 12,650 | ||||||
| Net cash provided by financing activities | 15,539 | 5,002 | ||||||
| Net change in cash | 6,805 | (104 | ) | |||||
| Cash and cash equivalents at beginning of period | 2,940 | 594 | ||||||
| Cash and cash equivalents at end of period | $ | 9,745 | $ | 490 | ||||
| Supplemental cash flow information | ||||||||
| Interest paid | $ | 8 | $ | 94 | ||||
| Non-cash items | ||||||||
| Transfer from accounts payable to other liabilities for amounts paid by insurance carrier | $ | — | $ | 1,510 | ||||
| Transfer of accounts payable to vendor line of credit | $ | — | $ | 59 | ||||
| Change in common stock warrant liability in conjunction with exercise/extinguishment of warrants | $ | — | $ | 103 | ||||
| Payment on line of credit in Class A common stock | $ | — | $ | 167 | ||||
| Discount from warrants issued in conjunction with 2016 Note Offering | $ | — | $ | 2,500 | ||||
| Accrued closing costs on Convertible Note | $ | — | $ | 651 | ||||
| Embedded derivative liability recorded in conjunction with April 2016 Offering | $ | — | $ | 2,616 | ||||
| Convertible notes interest paid with common stock | $ | 125 | $ | — | ||||
| For the Three Months Ended March 31, | ||||||||
| (in thousands except share data) | 2018 | 2017 | ||||||
| Operating activities: | ||||||||
| Net loss | $ | (4,338 | ) | $ | (4,034 | ) | ||
| (Loss) Income from discontinued operations | (21 | ) | 45 | |||||
| Loss from continuing operations | (4,317 | ) | (4,079 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities - continuing operations: | ||||||||
| Depreciation | 107 | 109 | ||||||
| Share-based compensation expense | - | 178 | ||||||
| Change in fair value of derivative liabilities and loss on debt extinguishment | (27 | ) | 378 | |||||
| Inventory obsolescence | (5 | ) | 218 | |||||
| Bad debt expense | 29 | 36 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | 726 | 761 | ||||||
| Costs in excess of billings on uncompleted contracts | - | 2 | ||||||
| Inventory | 266 | 140 | ||||||
| Deferred costs on uncompleted contracts | (51 | ) | (87 | ) | ||||
| Net investment in sales-type leases and other current assets | (80 | ) | (50 | ) | ||||
| Other non-current assets | 17 | (273 | ) | |||||
| Accounts payable | 731 | (1,152 | ) | |||||
| Accrued liabilities | (106 | ) | 136 | |||||
| Deferred revenue and other current liabilities | 142 | (330 | ) | |||||
| Other liabilities | (89 | ) | (17 | ) | ||||
| Net cash used in operating activities - continuing operations | (2,657 | ) | (4,030 | ) | ||||
| Net cash provided by (used in) operating activities - discontinued operations | 198 | (122 | ) | |||||
| Net cash used in operating activities | (2,459 | ) | (4,152 | ) | ||||
| Investing activities: | ||||||||
| Payments related to POWERHOUSE™ license | (64 | ) | - | |||||
| Purchases of property and equipment | (4 | ) | (252 | ) | ||||
| Proceeds from sale of property and equipment | - | 2 | ||||||
| Net cash used in investing activities | (68 | ) | (250 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from warrant exercises, net of costs | 8 | - | ||||||
| Restricted cash released upon conversion of debt | - | 173 | ||||||
| Proceeds from the issuance of warrants, net of costs | 822 | - | ||||||
| Proceeds from the issuance of common stock, net of costs | 830 | 16,029 | ||||||
| Principal payments on revolving line of credit | - | (663 | ) | |||||
| Net cash provided by financing activities | 1,660 | 15,539 | ||||||
| Net (decrease) increase in cash | (867 | ) | 11,137 | |||||
| Cash at beginning of year | 1,170 | 2,940 | ||||||
| Cash at end of year | $ | 303 | $ | 14,077 | ||||
| Non-cash items | ||||||||
| Convertible notes interest paid with common stock | - | 125 | ||||||
See accompanying notes.
| 7 |
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 ended March 31, 2018 and 2017, and has an accumulated deficit of $204.8 million at March 31, 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 review operations in order to identify additional strategies designed to generate cash flow, improve the Company's financial position, and enable 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.
Principles of Consolidation
We have prepared our unaudited interim condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.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 June 30, 2017,March 31, 2018, the interim results of operations for the three months ended March 31, 2018 and six months ended June 30, 2017, and 2016, and cash flows for the sixthree months ended June 30, 2017March 31, 2018 and 2016.2017. These interim statements have not been audited. The balance sheet as of December 31, 2016,2017 was derived from our audited consolidated financial statements included in our annual report on Form2017 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, 2016.2017.
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 10.12. Discontinued Operations.
Liquidity and Financial Resources Update
The Company has experienced recurring operating losses and negative cash flow from operations in recent years. Starting with the fourth quarter of 2014, measures were implementedwhich have necessitated: (i) developing plans to reducegrow revenue to generate positive cash outflow for operations suchflow and (ii) raising additional capital. No assurances can be given that the required level of salesCompany will be successful with its plans to achieve break-even results was reduced. These measures included (i) exiting the large commercial segment which was operating at both an operatinggrow revenue for profitable operations or, if necessary, raising additional capital. See Note 6, Shareholders Equity, Note 7, Convertible Debt and cash flow loss, (ii) reducing staffing levels, (iii) physically exiting the California market where its costs to operate were high, (iv) focusing on cash sales to customers and not leasing to customers, (v) negotiating lower costsNote 13, Subsequent Events for equipment, and (vi) operating initiatives designed to improve profitability such as reducing the length of cycle time for customer installations and lowering the cost of marketing.
The Company’s historical operating losses have required the Company to raise financial capital. During the fourth quarter of 2016, the Company raised $16.1 million of financialtransactions raising capital net of costs, and the Company raised an additional $16.0 million of financial capital, net of costs during the first quarter of 2017. See Note 5, Shareholders’ Equity. The Company used the proceeds from the financial capital raised to reduce accounts payable, purchase materials to convert its backlog to revenue and begin to execute its revenue growth strategy. The 2017 capital raises enabled the Company to terminate its line-of-credit facility and an Exclusive Supply Agreement (the “Supply Agreement”) with a co-terminus term, resulting in a reduction of costs for materials.2018.
The Company estimates thatCompany’s plans to operate profitably it will require approximately $16 million in quarterly revenue. Current quarterlygrow revenue is materially less than this amount and, accordingly, to be successful in increasing sales and resultant revenue, the Company is in the process of implementing a revenue growth strategy which includes the following components:are:
| · | Invest in the POWERHOUSE™ license by obtaining UL certification for POWERHOUSE™ 3.0, a prerequisite for commercialization of the product and, upon achieving UL certification, manufacture, market and sell POWERHOUSE™ 3.0 to roofing companies and new home builders; |
| · | Leverage the POWERHOUSE™ brand to generate leads and revenue for the Residential and Sunetric segments; |
| · | Leverage the Company’s investment in RGS 365™ customer-centric software for the POWERHOUSE™ and Solar Divisions; |
| · | Expand the |
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| · | Make available to the Company’s customers additional third-party providers to finance customer acquisitions of |
| · | Expand the Company’s network of authorized |
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 has preparedplans to maintain the areas of core competencies meeting expectations, such as its business plan for the ensuing twelve months,e-sales call center and believes it has sufficient financial resources to operate for the ensuing 12-month period. The plan (i) expects that because accounts payable at June 30, 2017 has been reduced to only $500k, future expenditures will be used for producing customer installation revenue and no longer having to expend cash to catch-up on previously outstanding accounts payable (ii) anticipates an increase in contract income from increasing customer installation revenue from implementation of the revenue growth strategy. commercial sales organization.
Until the Company is successful in implementing its plans to increase revenue to the level required to break-even,for profitable operations, the Company expects to have a cash outflow from operating activities. In addition,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 Company expects to have cash outflow from operating activities for the remaindercommercialization of POWERHOUSE™, prepayments with supply chain manufacturers and working capital as sales of the year,product commence. Additionally, the Company would be required to make the remaining “Initial License” payment of $2 million, which would be recorded as a cash is utilizedoutflow in investing activities.
To provide funds to increasegrow the Company’s revenue, 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, Convertible Debt). 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 Investor Notes (as defined and further discussed in Note 7, Convertible Debt) in an aggregate amount of $5 million secured by cash and/or securities held in investor accounts. Investors are required 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 and, upon satisfaction of Equity Conditions and certain other conditions, upon the occurrence of a specified mandatory prepayment event. The 2018 Notes (as defined and further discussed in Note 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 of Class A common stock at maturity, the Company would seek to refinance any remaining balance at that time from: (i) fundingnegotiations 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 of common stock warrants to induce conversion. No assurances can be given that should a balance remain on the 2018 Notes at maturity the Company will be successful in meeting the obligation under the 2018 Notes.
If the Company proceeds with commercialization of POWERHOUSE™ 3.0, 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 obtain 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. No assurances can be given that, should the Company determine to proceed with commercialization of POWERHOUSE™ 3.0, it will have available to it the additional capital necessary, either from the Investor Notes or an anticipated level of rooftop installations for customers, (ii) expanding e-sales and field sales organizations and (iii) increasing marketing spend for lead generation.alternative transaction.
2. Significant Accounting Policies
The Company made no changes to its significant accounting policies during the sixthree months ended June 30, 2017.March 31, 2018 with the exception of the adoption of ASC 606 as discussed in Note 3. Revenue.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. InDuring the three months ended June 30,second quarter of 2017, the Company concluded that it was appropriate to classify items in the statement of operations 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-current liabilities. Accordingly, the Company had revised the classification of certain items to report items in the statement of operations and balance sheet.
| December 31, | December 31, | |||||||||||
| 2016 | 2016 | |||||||||||
| As Filed | Reclassification | Revised | ||||||||||
| Current liabilities | ||||||||||||
| Accounts payable | $ | 2,555 | $ | (536 | ) | $ | 2,019 | |||||
| Accrued liabilities | $ | 1,284 | $ | 78 | $ | 1,362 | ||||||
| Current liabilities of discontinued operations | 1,457 | (536 | ) | 921 | ||||||||
| $ | 5,296 | $ | (994 | ) | $ | 4,302 | ||||||
| Long-term liabilities | ||||||||||||
| Other liabilities | $ | 1,764 | $ | 458 | $ | 2,222 | ||||||
| Noncurrent liabilities of discontinued operations | 225 | 536 | 761 | |||||||||
| $ | 1,989 | $ | 994 | $ | 2,983 | |||||||
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.
The change in classification of warranty liabilities increased working capital as follows:
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| December 31, | December 31, | |||||||||||
| 2016 | 2016 | |||||||||||
| (in thousands) | As Filed | Reclassification | Revised | |||||||||
| Working Capital | $ | 2,586 | $ | 994 | $ | 3,580 | ||||||
Service Revenue and Expense and Warranties
The Company recognizes service revenue when service work is completed for customers and third party owners of solar energy systems, and collection of receivables is reasonably assured. Concurrent with the recognition of revenue the costs of such services are reflected as service expense.
The Company warrants solar energy systems sold to customers for up to ten years against defects in installation workmanship. The manufacturers’ warranties on the solar energy system components, which are passed through to the customers, typically have product warranty periods of 10 years and a limited performance warranty period of up to 25 years. The Company provides for the estimated cost of warranties at the time the related revenue is recognized. This estimated future costs for the limited warranty is recorded as contract expenses on installation of solar energy systems. The Company also maintains specific warranty liabilities for large commercial customers included in discontinued operations. The Company assesses the accrued warranty reserve regularly and adjusts the amounts as necessary based on actual experience and changes in future estimates. This variance between the previously estimated warranty at the time of installation of the solar energy system and actual experience rate is recorded as service expense.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company’s management in accordance with GAAP for interim financial information and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, these unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the expected results for the year ending December 31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. Intercompany balances and transactions have been eliminated.
Recently Issued Accounting Standards
ASU 2018-05
On March 13, 2018, the Financial Accounting Standards Board (“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 will assess the impact of ASU 2017-11 on any derivative instruments entered into in the future.
ASU 2017-04
On January 26, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”),Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, which was issued to simplify the accounting for goodwill impairment. This ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017, and the2017. The Company is assessing 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”),Technical Corrections and Improvements to Topic 606,Revenue from Contracts with Customers. This ASU provides technical corrections and improvements to Topic 606. This ASU is effective for the Company on January 1, 2018, which coincides with the effective date of ASU 2014-09 (as defined below). The Company is assessing the impact ofhas adopted this ASU 2016-20 on its consolidated financial statements.effective January 1, 2018.
ASU 2016-18
On November 17, 2016, the FASB issued Accounting Standards Update No. 2016-18 (“ASU 2016-18”),Statement of Cash Flows: Restricted Cash,which was issued to address the diversity that currently exists in the classification and presentation of changes in restricted cash on the statement of cash flows. ThisASUrequires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts general described as restricted cash and restricted cash equivalents. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted and the Company is assessing the impact of ASU 2016-18 on its consolidated statements of cash flows.
ASU 2016-15
On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15 (“ASU 2016-15”),Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,which was issued to provide clarification on how certain cash receipts and cash payments are reported in the statement of cash flows. ThisASUaddresses eight specific cash flow issues in an effort to reduce existing diversity between companies. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted and the Company is assessing the impact of ASU 2016-15 on its consolidated statements of cash flows.
ASU 2016-02
On February 25, 2016, the FASB issued Accounting Standards Update No. 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 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.
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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.
During the second quarter of 2017, we began evaluating our contracts with customers and have determined that for the majority of our contracts, we do not currently anticipate there would be any significant change to timing or method of recognizing revenue. As such, we do not believe The Company has adopted this new standard will have a material impact on our results of operations, financial condition or cash flows. We are planning to adopt the new standardASU as of January 1, 2018 as discussed in Note 3.
3. Revenue
Effective January 1, 2018, the Company has adopted “ASC 606 –Revenue From 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 utilizeuncertainty 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 three months ended March 31, 2018, the adoption of ASC 606 has resulted in the following changes in significant accounting policies:
Deferred Revenue
When we receive 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 record deferred revenue, which represents a contract liability. We recognize deferred revenue as net sales after we have transferred control of the goods or services to the customer and all revenue recognition criteria are met.
Revenue Recognition – Installation of photovoltaic modules (“PV”) solar systems
We generally recognize revenue for installation of PV solar systems at a point in time 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 their analysis and determined that each project started during the three months ended March 31, 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 three months ended March 31, 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.
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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 projects in which control of the PV solar systems transfers to the customer over time. As of March 31, 2018, no such project exists however, if the Company takes on such a project in the future, the Company will determine whether an input or output method is most appropriate to recognize revenue in a pattern that reflects the transfer of control of the promised good or service to the customer.
Revenue Recognition – Operations & Maintenance
We generally recognize 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. These services are treated as stand-ready performance obligations and 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.
3. Line of CreditRevenue Recognition – Service & Warranty
On February 9, 2017,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 and does not provide any incremental service to the customer. It is necessary for the Company terminated its lineto 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 credit with Solar Solutionsa project. Any services provided to a customer outside of warranties such as system inspections are recognized upon completion of the service.
Adoption of the standards 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. Segment Information for further information, including revenue by segment.
4. Property and Distribution, LLC. Additionally,Equipment
Property and equipment, stated at lower of cost or estimated fair value, consists of the Company had a Supply Agreement with Solar Solutions which was coterminous with the line of credit and accordingly, that was terminatedfollowing as of the same date. As of June 30, 2017, the Company does not have a line of credit facility.March 31 and December 31, respectively:
| (in thousands) | 2018 | 2017 | ||||||
| Buildings and leasehold improvements | 441 | 441 | ||||||
| Furniture, fixtures and equipment | 1,811 | 1,811 | ||||||
| Software | 2,135 | 2,135 | ||||||
| Vehicles and machinery | 1,041 | 1,044 | ||||||
| Total property and equipment | 5,428 | 5,431 | ||||||
| Accumulated depreciation and amortization | (4,375 | ) | (4,275 | ) | ||||
| Total property and equipment, net | $ | 1,053 | $ | 1,156 | ||||
4.
5. Commitments and Contingencies
The Company leases office and warehouse space through operating leases. Some of the 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 five years with varying termination dates through August 2020.2021.
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The following schedule represents the annual future minimum payments of all leases as of June 30, 2017:March 31, 2018:
| Future Minimum | ||||||||
| (in thousands) | Future Minimum | Lease Payments | ||||||
| 2017 | $ | 471 | ||||||
| 2018 | 638 | $ | 679 | |||||
| 2019 | 561 | 856 | ||||||
| 2020 | 506 | 506 | ||||||
| 2021 | 416 | 439 | ||||||
| 2022 and thereafter | 112 | 112 | ||||||
| Total minimum lease payments | $ | 2,704 | $ | 2,592 | ||||
The Company incurred office and warehouse rent expense of $0.2 million and $0.2automobile lease expense of $0.1 million for the three months ended June 30, 2017 and 2016, respectively and $0.3 and $0.4 million for the six months ended June 30, 2017 and 2016, respectively.March 31, 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 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 proceedings that are considered to be in the normal course of business. As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the first quarter of 2017, on
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 Capital 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 does not expectfiled 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 incur any material chargesprepare 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 this lawsuitthe Effective Date and as of June 30, 2017, the Company has not recordedremaining $2 million will become a liability associated with this lawsuit. However, the Company expects its litigation expense to increase in the near future as a result thereof.upon obtaining UL certification and payable within 30 days thereafter.
On May 1, 2017, Roth Capital Partners, LLC requested indemnification byJanuary 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 its legal expenses relatedthe 2017 annual meeting of shareholders, (ii) withdraw (and not resubmit) Iroquois’ proxy statement in opposition to this lawsuit under the termsCompany’s proposals for the 2017 annual meeting of shareholders, and (iii) promptly notify the staff of the Placement AgencySEC 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, associated with the February 6, 2017 offering. The Company, under the circumstances, disputes the request for indemnification.
5. Shareholders’ Equity
The following transactions were completed during the six months ended June 30, 2017:
January 2017 Reverse Stock Split
On January 25, 2017, the Company executed a reverse stock split of all outstanding shares of the Company’s Class A common stock at a ratio of one-for-thirty, whereby thirtyissued 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 were combined intorespectively 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.
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6. Shareholders’ Equity
January 2018 Offering
On January 4, 2018, the Company closed a registered offering and concurrent private placement with one shareinstitutional and accredited investor in which the Company issued and sold to the Investor (i) 800,000 shares of Class A common stock. The reverse split was previously authorized bystock, (ii) a vote of the Company’s shareholders on January 23, 2017. The Company did not decrease its authorizedprepaid Series P Warrant to purchase 800,000 shares of capital stock in connection with the reverse stock split. Share amounts are presented to reflect the reverse split for all periods.
February 2017 Offerings
On February 6, 2017, the Company closed a $11.5 million offering and sale of (a) units, “February 6 Primary Units,” each consisting of one share of the Company’s Class A common stock, and (iii) a Series K warrantO Warrant to purchase one1,600,000 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 (b) units, “February 6 Alternative Units,” each consisting of a prepaid Series L warrant to purchase one$1.14 per share of Common Stock, and a Series K warrant pursuant to the Securities Purchase Agreement, dated as of February 1, 2017, by and among the Company and several institutional investors, and to public retail investors. As a result, the Company issued 2,096,920 February 6 Primary Units, 1,613,080 February 6 Alternative Units, 2,096,920 shares of Class A common stock as partunderlying the Series P Warrant for aggregate gross proceeds of the February 6 Primary Units, Series K warrants to purchase 3,710,000 shares of Class A common stock, and Series L warrants to purchase 1,613,080 shares of Class A common stock. The purchase price for a February 6 Primary Unit was $3.10 and the purchase price for a February 6 Alternative Unit was $3.09. The Series K Warrants are currently exercisable at a price of $3.10 per share, and are exercisable for a period of five years.approximately $1.8 million. The Company received net proceeds of approximately $10.5$1.5 million at the closing, after deducting commissions to the placement agents and estimated offering expenses payable by the Company associated with the offering. As of June 30, 2017, there were 3,710,000 Series K warrants outstanding.closing.
On February 9, 2017, the Company closedThe Series O Warrant is exercisable at any time starting six months after issuance, and will remain exercisable for a $6 million offeringperiod of five years thereafter at an initial exercise price of $1.47 per share, subject to adjustments for stock splits and salesimilar events. The Series P Warrant is exercisable immediately after issuance and for a period of (a) units, “February 9 Primary Units,” each consistingfive years thereafter at an initial exercise price of one$1.15 per share, of which $1.14 was paid at the Company’s Class A common stock, and a Series M warrant to purchase 75% of oneclosing with $0.01 per share payable upon exercise. On January 4, 2018, the investor paid $0.01 per share of Class A common stock and (b) units, “February 9 Alternative Units,” each consisting of a prepaidto exercise the Series N warrant to purchase one share of Class A common stock, and a Series M warrant, pursuant to the Securities Purchase Agreement, dated as of February 7, 2017, by and among the Company and several institutional and accredited investors. As a result, the Company issued 1,650,000 February 9 Primary Units, 750,000 February 9 Alternative Units, 1,650,000 shares of Class A common stock as part of the February 9 Primary Units, Series M warrants to purchase 1,800,000 shares of Class A common stock, and Series N warrants to purchase 750,000 shares of Class A common stock. The purchase price for a February 9 Primary Unit was $2.50 and the purchase price for a February 9 Alternative Unit was $2.49. The Series M Warrants are currently exercisable at a price of $2.40 per share, and are exercisable for a period of five years. The Company received net proceeds of approximately $5.5 million at the closing, after deducting commissions to the placement agents and estimated offering expenses payable by the Company associated with the offering. As of June 30, 2017, there were 1,800,000 Series M warrants outstanding.
P Warrant.
Option and Warrant Exercises
During the three and six months ended June 30,March 31, 2018 and 2017, and 2016, the Company issued nodid not issue any stock options nor issue any shares of its Class A common stock to employees upon the exercise of stock options. During the sixthree months ended June 30, 2017 and 2016March 31, 2018, the Company issued zero and 69800,000 shares of its Class A common stock pursuant toupon the exercise of prepaid Series P warrants respectively.attributable to the January 2018 Offering.
At June 30, 2017,March 31, 2018, the Company had the following shares of Class A common stock reserved for future issuance:
| Stock options and grants outstanding under incentive plans | ||||
| Common stock warrants outstanding - derivative liability | ||||
| Common stock warrants outstanding - equity security | ||||
| 7,538,846 | ||||
| Total shares 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 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 Class A common stock at a conversion price. 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.
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6.
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 Notes 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.
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.
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 subject 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 earlier to occur of (A) the first date on which the SEC declares effective one or more registration statements registering the resale of the shares of Class A common stock underlying the 2018 Notes and the Series Q Warrants, and (B) the first date on which all of such shares of Class A common stock are eligible to be resold by the holders pursuant to Rule 144 promulgated under the Securities Act, subject to (1) certain Equity Conditions, (2) a requirement that the average volume weighted average price of the Class A common stock exceed a specified amount, and (3) that no event of default is then existing and continuing.
At the closing of the 2018 Note Offering, the Company entered into a Registration Rights Agreement with the purchaser of 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, 2018, and the SEC declared the registration statement effective on May 4, 2018.
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8. Fair Value Measurements
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:
| Balance at June 30, 2017 (in thousands) | Total | Quoted Prices in Active Markets for Identical Items (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
| Quoted Prices | ||||||||||||||||||||||||||||||||
| in Active | Significant | |||||||||||||||||||||||||||||||
| Markets for | Other | Significant | ||||||||||||||||||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||||||||||||||||||
| Items | Inputs | Inputs | ||||||||||||||||||||||||||||||
| Balance at March 31, 2018 (in thousands) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||||||
| Common stock warrant liability | $ | 53 | $ | — | $ | — | $ | 53 | $ | 49 | - | - | $ | 49 | ||||||||||||||||||
For the Company’s Level 3 measures, which represent common stock warrants, fair value is based on a Monte Carlo pricing model that 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 Company used a market approach to valuing 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 June 30, 2017:March 31, 2018:
| (in thousands) | Common stock warrant liability | Embedded derivative liability | Total | |||||||||
| Fair value of derivative liabilities at December 31, 2016 | $ | 137 | $ | 46 | $ | 183 | ||||||
| Change in the fair value of derivative liabilities, net | (84 | ) | - | (84 | ) | |||||||
| Adjustments for conversions of Notes | - | (46 | ) | (46 | ) | |||||||
| Fair value of derivative liabilities at June 30, 2017 | $ | 53 | - | $ | 53 | |||||||
| Embedded | ||||||||||||
| Common Stock | derivative | |||||||||||
| (in thousands) | warrant liability | liability | Total | |||||||||
| Fair value of derivative liabilities at December 31, 2017 | $ | 76 | $ | - | $ | 76 | ||||||
| Change in the fair value of derivative liabilities, net | (27 | ) | - | (27 | ) | |||||||
| Adjustment for conversions of Notes | - | - | - | |||||||||
| Fair value of derivative liabilities at March 31, 2018 | $ | 49 | $ | - | $ | 49 | ||||||
7.9. Share-Based Compensation
During the sixthree months ended June 30, 2017, under its 2008 Long-Term Incentive Plan, as amended,March 31, 2018, the Company did not grant any stock options and cancelled zeroone stock optionsoption versus zero grants of stock options and cancellations of 2023 stock options during the sixthree months ended June 30, 2016.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.
Total share-based compensation expense recognized was $0.05 million$0 and $0.2 million during both the three months ended June 30, 2017March 31, 2018 and 2016, respectively, and $0.2 million and $0.3 million during the six months ended June 30, 2017 and 2016, respectively.2017.
8.10. Net Income (Loss) Per Share
Basic net income (loss) per share excludes any dilutive effects of options, warrants or the Notes.our senior secured convertible notes (the “2016 Notes”) due on April 1, 2019. 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 6.57.5 million and 110,0006.5 million for the three months ended June 30,March 31, 2018 and 2017, and 2016, respectively, and 6.5 million and 110,000 for the six months ended June 30, 2017 and 2016, respectively, from the computation of diluted net loss per share because their effect was antidilutive.
9.
| For the Three Months Ended March 31, | ||||||||
| (In thousands, except per share data) | 2018 | 2017 | ||||||
| Numerator for basic and diluted net loss per share | $ | (4,338 | ) | $ | (4,034 | ) | ||
| Denominator: | ||||||||
| Weighted average shares for basic net loss per share | 10,210 | 4,709 | ||||||
| Effect of dilutive securities: | ||||||||
| Weighted average of common stock, stock options and warrants | - | - | ||||||
| Denominators for diluted net loss per share | 10,210 | 4,709 | ||||||
| Net loss per share—basic and diluted | $ | (0.42 | ) | $ | (0.86 | ) | ||
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11. Segment Information
The Company operates as threefour reportable segments: (1) Residential – the installation of solar energy systems for homeowners, including lease financing thereof, and small business commercial in the continental United States;U.S.; (2) Sunetric – the installation of solar energy systems for both homeowners and business owners (commercial) in Hawaii; (3) POWERHOUSE™ – the manufacturing and (3)sale of solar shingles; and (4) Other – corporate operations. 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:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Contract revenue: | ||||||||||||||||
| Residential | $ | 2,472 | $ | 3,309 | $ | 6,119 | $ | 7,076 | ||||||||
| Sunetric | 525 | 1,588 | 544 | 2,775 | ||||||||||||
| Other | — | — | — | — | ||||||||||||
| Consolidated contract revenue | 2,997 | 4,897 | 6,663 | 9,851 | ||||||||||||
| Loss from continuing operations: | ||||||||||||||||
| Residential | (1,706 | ) | (893 | ) | (2,354 | ) | (2,157 | ) | ||||||||
| Sunetric | (532 | ) | (291 | ) | (1,336 | ) | (1,089 | ) | ||||||||
| Other | (1,769 | ) | (1,746 | ) | (4,018 | ) | (3,424 | ) | ||||||||
| Consolidated loss from continuing operations | (4,007 | ) | (2,930 | ) | (7,708 | ) | (6,670 | ) | ||||||||
| Reconciliation of consolidated loss from operations to consolidated net loss: | ||||||||||||||||
| Derivative and other | 10 | (576 | ) | (368 | ) | (648 | ) | |||||||||
| Income tax (expense) benefit | — | (27 | ) | — | (27 | ) | ||||||||||
| Income (loss) from discontinued operations, net of tax | (33 | ) | 70 | 12 | 231 | |||||||||||
| Net loss | $ | (4,030 | ) | $ | (3,463 | ) | $ | (8,064 | ) | $ | (7,114 | ) | ||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| (in thousands) | 2018 | 2017 | ||||||
| Contract revenue: | ||||||||
| Residential | 2,485 | 3,644 | ||||||
| Sunetric | 337 | 19 | ||||||
| POWERHOUSE™ | - | - | ||||||
| Other | - | - | ||||||
| Consolidated contract revenue | 2,822 | 3,663 | ||||||
| Operating loss from continuing operations: | ||||||||
| Residential | (1,871 | ) | (1,033 | ) | ||||
| Sunetric | (597 | ) | (804 | ) | ||||
| POWERHOUSE™ | (51 | ) | - | |||||
| Other | (1,829 | ) | (1,863 | ) | ||||
| Operating Loss | (4,348 | ) | (3,700 | ) | ||||
| Reconciliation of consolidated loss from operations to consolidated net loss: | ||||||||
| Derivative and Other | 31 | 107 | ||||||
| Debt accretion expense and loss on extinguishment | - | (486 | ) | |||||
| Gain from discontinued operations, net of tax | (21 | ) | 45 | |||||
| Net loss | (4,338 | ) | (4,034 | ) | ||||
The following is a reconciliation of reportable segments’ assets to the Company’s consolidated total assets. The Other segment includes certain unallocated corporate amounts.
| (in thousands) | June 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | ||||||||||||
| Total assets – continuing operations: | ||||||||||||||||
| Residential | $ | 6,317 | $ | 7,159 | $ | 6,284 | $ | 5,877 | ||||||||
| Sunetric | 1,043 | 1,196 | 1,412 | 2,142 | ||||||||||||
| POWERHOUSE™ | 1,226 | 1,140 | ||||||||||||||
| Other | 11,077 | 3,857 | 1,610 | 3,278 | ||||||||||||
| $ | 18,437 | $ | 12,212 | $ | 10,532 | $ | 12,437 | |||||||||
| Total assets – discontinued operations: | ||||||||||||||||
| Commercial | 2,020 | 2,161 | 1,654 | 1,821 | ||||||||||||
| $ | 20,457 | $ | 14,373 | $ | 12,186 | $ | 14,258 | |||||||||
10.
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12. Discontinued Operations
The following is a reconciliation of the major line items constituting pretax income of discontinued operations to the after-tax gain on discontinued operations that are presented in the condensed consolidated statements of operations as indicated:
| For the Three Months Ended | ||||||||||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | March 31, | ||||||||||||||||||||||
| (in thousands) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||
| Major line items constituting pretax gain (loss) of discontinued operations: | ||||||||||||||||||||||||
| Major line items constituting pretax loss of discontinued operations: | ||||||||||||||||||||||||
| Contract revenue | $ | 1 | $ | 123 | $ | 5 | $ | 346 | $ | - | $ | 4 | ||||||||||||
| Contract expense | 2 | 17 | — | 30 | ||||||||||||||||||||
| Contract expense (income) | - | (2 | ) | |||||||||||||||||||||
| Operating and other expense | 32 | 36 | (17 | ) | 85 | 21 | (49 | ) | ||||||||||||||||
| Pretax income (loss) from discontinued operations | (33 | ) | 70 | 22 | 231 | $ | (21 | ) | 55 | |||||||||||||||
| Income (loss) from discontinued operations, net of tax | $ | (33 | ) | $ | 70 | $ | 12 | $ | 231 | |||||||||||||||
| Income from discontinued operations, net of tax | $ | (21 | ) | $ | 45 | |||||||||||||||||||
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:
| (in thousands) | June 30, 2017 | December 31, 2016 | ||||||
| Carrying amounts of major classes of assets included as part of discontinued operations: | ||||||||
| Current assets: | ||||||||
| Accounts receivable, net | $ | 584 | $ | 536 | ||||
| Costs in excess of billings on uncompleted contracts | 62 | 207 | ||||||
| Inventory, net | 37 | 37 | ||||||
| Surety bond deposit | 624 | — | ||||||
| Other current assets | 108 | 129 | ||||||
| Total major classes of current assets of the discontinued operations | 1,415 | 909 | ||||||
| Noncurrent assets: | ||||||||
| Other noncurrent assets | 605 | 1,252 | ||||||
| Total noncurrent assets of discontinued operations | 605 | 1,252 | ||||||
| Total assets of the discontinued operations in the balance sheet | $ | 2,020 | $ | 2,161 | ||||
| Carrying amounts of major classes of liabilities included as part of discontinued operations: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 270 | $ | 285 | ||||
| Accrued liabilities | 350 | 523 | ||||||
| Deferred revenue and other current liabilities | 113 | 113 | ||||||
| Total current liabilities of discontinued operations | 733 | 921 | ||||||
| Noncurrent liabilities: | ||||||||
| Other liabilities | 758 | 761 | ||||||
| Total major classes of noncurrent liabilities of the discontinued operations | 758 | 761 | ||||||
| Total liabilities of the discontinued operations in the balance sheet | $ | 1,491 | $ | 1,682 | ||||
| March 31, | December 31, | |||||||
| (in thousands) | 2018 | 2017 | ||||||
| Carrying amounts of major classes of assets included as part of discontinued operations: | ||||||||
| Current assets: | ||||||||
| Accounts receivable, net | $ | 325 | $ | 394 | ||||
| Costs in excess of billings on uncompleted contracts | 62 | 62 | ||||||
| Inventory, net | 69 | 63 | ||||||
| Other current assets | 624 | 723 | ||||||
| Total major classes of current assets of the discontinued operations | 1,080 | 1,242 | ||||||
| Noncurrent assets: | ||||||||
| Other noncurrent assets | 574 | 579 | ||||||
| Total noncurrent assets of discontinued operations | 574 | 579 | ||||||
| Total assets of the discontinued operations in the balance sheet | $ | 1,654 | $ | 1,821 | ||||
| Carrying amounts of major classes of liabilities included as part of discontinued operations: | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 270 | $ | 270 | ||||
| Accrued liabilities | 33 | 33 | ||||||
| Deferred revenue and other current liabilities | 486 | 418 | ||||||
| Total current liabilities of discontinued operations | 789 | 721 | ||||||
| Noncurrent liabilities: | ||||||||
| Other liabilities | 729 | 745 | ||||||
| Total major classes of noncurrent liabilities of the discontinued operations | 729 | 745 | ||||||
| Total liabilities of the discontinued operations in the balance sheet | $ | 1,518 | $ | 1,466 | ||||
11.13. Subsequent Events
On April 9, 2018, the Company closed the 2018 Note Offering (See Note 7. Convertible Debt) and entered into two separate Amendment No. 1 to Securities Purchase Agreement (the “Amendments”) with each investor party to the 2018 Note Offering Securities Purchase Agreement. The substantially identical Amendments amended and restated forms of 2018 Notes to increase the initial conversion price of the Notes from $1.2405 to $1.26 per share and, as a result, made changes to the Schedule of Buyers to the Securities Purchase Agreement to reflect a change in the number of shares of Common Stock that may become issuable upon exercise of Series Q Warrants. The parties entered into the Amendments as a result of certain discussions with, and comments by, Nasdaq staff. Other than as described in this paragraph, no other changes were made to the terms of the 2018 Notes or the transaction in general. The Amendments contains customary provisions for agreements of this nature, such as representations, warranties and covenants.
At the closing on April 9, 2018, the parties entered into or executed the following agreements and documents:
| · | The Company entered into a Registration Rights Agreement with the investors under which the Company has agreed to register for resale the shares of Common Stock issuable upon conversion of the Notes and upon exercise of the Series Q Warrants. |
| · | The Company entered into separate Note Purchase Agreements (each, an “NPA”) with each investor under which each Investor issued to the Company such Investor’s Investor Note. |
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| · | Each investor issued an Investor Note to the Company under the respective NPA. |
| · | The Company entered into separate Master Netting Agreements (each, a “Master Netting Agreement”) with each investor for the purpose of clarifying for each party its right to offset obligations that may arise under the Securities Purchase Agreement, the Investor Notes and the Series B Notes upon the occurrence of certain events. |
At the closing on April 9, 2018, the Company also issued and sold to the placement agent in the 2018 Note Offering for a sum of $100 a warrant (the “Placement Agent Warrant”) to purchase 730,159 shares of Class A common stock, pursuant to the terms of an Engagement Agreement. The Placement Agent Warrant has substantially the same terms as the Series Q Warrants other than that the Placement Agent Warrant has a cashless exercise right regardless of whether an effective registration statement registering, or a current prospectus being available for, the resale of the shares of Class A common stock underlying the Placement Agent Warrant.
The Company has evaluated events up to the filing date of these interim financial statements and determined that, other than what has been disclosed above, no further subsequent event activity required disclosure.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board On May 9, 2018 and May 10, 2018, holders of Directors and Shareholders
Real Goods Solar, Inc.
We have reviewed the condensed consolidated balance sheet2018 Notes converted an aggregate principal amount of Real Goods Solar, Inc. and subsidiaries as$338,000 into 268,262 shares of June 30, 2017, the related condensed consolidated statements of operations for the three-month and six month periods ended June 30, 2017 and 2016, condensed consolidated statement of changes in shareholders’ equity for the six months ended June 30, 2017, and the condensed consolidated statements of cash flows for the six months ended June 30, 2017 and 2016. These financial statements are the responsibility of the company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).Class A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Real Goods Solar, Inc. and subsidiaries as of December 31, 2016, and the related consolidated statements of operations, changes in shareholders’ equity (deficit), and cash flows for the year then ended (not presented herein); and in our report dated March 9, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Hein & Associates LLP
Hein & Associates LLP
Denver, Colorado
August 14, 2017common stock.
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The following discussionItem 2. Management’s Discussion and analysis provides information that we believe is relevant to an assessmentAnalysis of Financial Condition and understandingResults of our results of operation and financial condition. You should read this analysis in conjunction with our interim condensed consolidated financial statements and related footnotes. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements, including those set forth in our Form 10-K for the year ended December 31, 2016 and in this Quarterly Report for the period ended June 30, 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 in 2016. We now report this business as a discontinued operation, separate from our continuing operations. The following management discussion and analysis of financial condition and results of operations is for our continuing operations, unless indicated otherwise.
Overview
We are a residential and small business commercial solar energy engineering, procurement and construction firm. We offer turnkey services, including design, procurement, permitting, build-out, grid connection, financing referrals and warranty and customer satisfaction activities. Our solar energy systems use high-quality solar photovoltaic modules. We use proven technologies and techniques to help customers achieve meaningful savings by reducing their utility costs. In addition, we help customers lower their reliance upon fossil fuel energy sources. As of September 29, 2017, we are the exclusive domestic and international licensee of the POWERHOUSE™ in-roof solar shingle, an innovative and aesthetically pleasing solar shingle system developed by Dow.
We, including our predecessors, have more than 39 years of experience in residential solar energy and trace our roots to 1978, when Real Goods Trading Corporation sold the first solar photovoltaic panels in the United States. We have designed and installed over 25,00026,000 residential and commercial solar energy systems since our founding.
During 2014, we discontinued our entire former Commercial segment and sold the assets associated with our catalog business (a portion of the Other segment). As of September 30, 2017, we created a new segment for our POWERHOUSE™ business. As a result, of this major strategic shift, we now operate as threefour reportable segments: (1) Residential – the installation of solar energy systems for homeowners, including lease financing thereof, and for small businesses (small business commercial)commercial in the continental U.S.;United States; (2) Sunetric – the installation of solar energy systems for both homeowners and business owners (commercial) in Hawaii; (3) POWERHOUSE™ - the manufacturing and (3)sales of solar shingles; and (4) Other – corporate operations. We believe this structure enables us to more effectively manage our operations and resources.
We experienced recurring operating losses and negative cash flow from operations in recent years. Starting with the fourth quarter of 2014, we implemented measures to reduce cash outflow for operations such that the required level of sales to achieve break-even results was reduced. These measures included (i) exiting the large commercial segment which was operating at both an operating and cash flow loss, (ii) reducing staffing levels, (iii) physically exiting the California market where its costs to operate were high, (iv) focusing on cash sales to customers and not leasing to customers, (v) negotiating lower costs for equipment, and (vi) operating initiatives designed to improve profitability such as reducing the length of cycle time for customer installations and lowering the cost of marketing.
Our historical operating losses have required us to raise financial capital. During the fourth quarter of 2016, we raised $16.1 million of financial capital, net of costs, and we raised an additional $16.0 million of financial capital, net of costs during the first quarter of 2017. We used a portion of the proceeds from the financial capital raised to reduce accounts payable, purchase materials to convert backlog to revenue and begin to execute our revenue growth strategy.
Revenue Growth Strategy
We estimate that to operate profitably we will require approximately $16 million in quarterly revenue. Current quarterly revenue is materially less than this amount and, accordingly, to be successful in increasing sales and resultant revenue, we are in the process of implementing a revenue growth strategy which includes the following components:
We generally recognize revenue from solar energy systems sold to our customers when we install the solar energy system. Our business requires that we incur costs of acquiring solar panels and labor to install solar energy systems on our customer rooftops up-front and receive cash from customers thereafter. As a result, during periods when we are increasing sales, we expect to have negative cash flow from operations.
Explanation of Key Operating Metrics and Other Items
We regularly review a number of metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Some of our key operating metrics are estimates that are based on our management’s beliefs and assumptions and on information currently available to management. Although we believe that we have a reasonable basis for each of these estimates, we caution you that these estimates are based on a combination of assumptions that may prove to be inaccurate over time. Any inaccuracies could be material to our actual results when compared to our calculations. Please see the section titled “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Item 1A of this Quarterly Report on Form 10-Q for more information. Furthermore, other companies may calculate these metrics differently than we do now or in the future, which would reduce their usefulness as a comparative measure.
Statement of Operations
We took the necessary steps to reclassify our statement of operations this quarter to help our shareholders understand better the business through the eyes of management. We concluded that it was appropriate to classify items to conform with operating metrics reported to investors and the way management evaluates financial performance. Definitions of the statement of operations is as follows:
Revenue from installation of solar energy systemsPOWERHOUSE™ License Agreement
Revenue includesA material significant event occurred on September 29, 2017 (the “Effective Date”), when we executed the contractual salesLicense with Dow, providing an exclusive domestic and international right to commercialize its POWERHOUSE™ in-roof solar shingle, an innovative and aesthetically pleasing solar shingle system developed by Dow. The POWERHOUSE™ 1.0 and 2.0 versions used CIGS (copper indium gallium selenide solar cells) technology which had a high manufacturing cost, resulting in the product not being consumer price friendly. Conversely, the POWERHOUSE™ 3.0 is being developed with traditional silicon solar cells to increase solar production and to provide a competitive consumer price point. The License requires us to commercialize and sell a minimum of 50 megawatts of solar energy systems substantially completed.within 5-years of the Effective Date to retain exclusive world-wide rights, a requirement we believe is achievable.
Revenue from leasingIn addition to the License, we executed a Trademark License Agreement (the “TLA”), a Technology Service Agreement and a Sales Agreement-Surplus Property (the “Sales Agreement”) with Dow. The execution of solar energy systemsthe TLA will allow us to market the POWERHOUSE™ 3.0 product using the Dow name. The Sales Agreement identified used manufacturing molds that Dow transferred title to us for a cost of $1.
Revenue includesUnder the terms of the License, we will produce, market and sell POWERHOUSE™ 3.0, for which we have agreed to a license fee of $3 million and a running royalty fee equal to 2.5% against net amortizationsales of unearned revenuethe POWERHOUSE™ product and projected expensesservices, payable quarterly in arrears. Further, we will be responsible for all post-Effective Date costs to obtain UL certification and for the prosecution of all related patents world-wide, which may be offset against the payment of the running royalty fee. The license fee is comprised of two payments. We paid the first $1 million within 10 days of the Effective Date of the License in 2017 in accordance with the TLA. The remaining $2 million is due within 30 days of the Company receiving UL certification of the POWERHOUSE™ 3.0 product. Upon obtaining UL certification, we intend to residential customer leasesbegin commercialization of solar energy systems.
InstallationPOWERHOUSE™ 3.0 entailing the manufacturing, marketing and sale of solar energy systems expensePOWERHOUSE™ 3.0 to roofing companies.
The expense of solar energy systems installed principally includes the costs of materials we purchase from manufacturers of photovoltaic equipment and the cost of personnel directly involved with the installation of solar energy systems including direct labor of our construction crews and those of third party integrators. In addition, cost of services includes the estimated cost of our limited warranty, travel costs, and fees we pay third party financiers providing loans to our customers to finance their solar energy systems.
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Service income and expense
Service income includes revenue from service contracts with customersAs of March 31, 2018, we have invested approximately $1.2 million that has been capitalized to provide maintenancethe POWERHOUSE™ License, an intangible asset on customer owned solar energy systems. In addition, it includes revenue from operating and maintenance service provided to third-party owners of portfolios of solar energy systems. Service expense includes the labor and material costs of servicing customers under service contracts and excess warranty expense over estimated warranty costs included in the expense of solar energy systems sold.
Customer acquisition expense
Customer acquisition expense principally includes compensation expense, including commissions, of our sales and marketing personal and expenses we incur to receive potential customer leads from third party providers and digital marketing. Customer acquisition expense is a key metric for us as our goal is to acquire customers at a cost enabling us to achieve a targeted contribution to recovery of overhead expenses.
Contract income (loss)
Contract income is a key metric for us because it must be in excess of our operating expenses in order to achieve break-even and better results in future periods.
Operating expense
Operating expense consists of costs associated with managing our business segments; Residential, Sunetric and Corporate. These items include administrative costs associated with sales, general and administrative expenses associated with administrative services such as product development, legal settlements, legal, information systems (including core technology and telephony infrastructure), and accounting and finance. It also includes outside professional fees (i.e., legal and accounting services), building expenses and other items associated with general business administration.
Derivative and other
Derivative and other principally include changes in fair value of derivative liabilities, loss on debt extinguishment, gain (loss) on sale of fixed assets, amortization of debt discount, and interest expense.Consolidated Balance Sheet.
Other Key Metrics
Backlog
Backlog is discussed below and is an important metric as we implement our revenue growth strategy.
Key Operational Metric, Gross Margin on Residential Segment, Our Largest Segment
We utilize a job costing system whereby employees record their time to projects. We accumulate the cost of idle time reflecting the cost we incur to maintain a construction organization until our revenue grows, allowing for greater utilization of our construction organization. Cost of goods sold (“COGS”) include direct project installation costs (materials, labor, travel, financing fees, and estimated warranty costs) and indirect costs for project installation support (including un-utilized labor of idle time of construction crews, supplies, and insurance). We employ an internal time reporting system to determine COGS and resulting gross margin percentage used by the Company to measure its performance in achieving gross margin percentage targets. Further, we measure COGS per watt based upon COGS, excluding idle time, divided by the aggregate watts of systems installed during the period. For financial reporting purposes, COGS include the idle time of construction crews currently maintained by the company in anticipation of future growth of backlog. Gross margin percentage on actual installation time is not a measure defined by generally accepted accounting principles.
The majority of indirect labor costs are fixed, which impacts the gross margin percentage when we consider idle time. For the three months ended March 31, 2018, the suspension of the Rhode Island Renewal Energy Growth Program (the “Rhode Island Program”) resulted in our carrying greater idle time than the same period in 2017, as management elected to keep all of its Rhode Island installation crews during this period having knowledge the Rhode Island Program would be reinstated on April 1, 2018.We anticipate an improvement in our gross margin percentage in future periods from increased revenue from our implementation of our revenue growth strategy.
| Three Months Ended June 30, 2016 | Six Months Ended June 30, 2016 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 | March 31, 2018 | March 31, 2017 | |||||||||||||||||
| Gross margin % on actual installation time | 24 | % | 22 | % | 20 | % | 24 | % | 23% | 6% | ||||||||||||
| Gross margin % including idle time | 12 | % | 9 | % | 4 | % | 11 | % | 1% | 6% | ||||||||||||
Backlog
Backlog represents the dollar amount of revenue that we may recognize in the future from signed contracts to install solar energy systems that have not yet been installed.installed without taking into account possible future cancellations. Backlog is not a measure defined by GAAP, and is not a measure of contract profitability. Our methodology for determining backlog may not be comparable to methodologies used by other companies in determining their backlog amounts. The backlog amounts we disclose are net of cancellations and include anticipated revenues associated with (i) the original contract amounts, and (ii) change orders for which we have received written confirmations from the applicable customers. Backlog may not be indicative of future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers. We can provide no assurance as to the profitability of our contracts reflected in backlog. Backlog is not a measure defined by GAAP, and is not a measure of contract profitability. Our methodology for determining backlog may not be comparable to methodologies used by other companies in determining their backlog amounts.
The following table summarizes changes to our backlog by segment during the six-monththree-month period ended June 30, 2017:March 31, 2018:
| (in thousands) | Residential | Sunetric | Totals | |||||||||
| Backlog of December 31, 2016 | $ | 6,927 | $ | 2,448 | $ | 9,375 | ||||||
| Bookings from new awards (“Sales”) | 2,953 | 82 | 3,035 | |||||||||
| Cancellations and reductions on existing contracts | (1,646 | ) | — | (1,646 | ) | |||||||
| Amounts recognized in revenue upon installation | (3,372 | ) | — | (3,372 | ) | |||||||
| Backlog at March 31, 2017 | 4,862 | 2,530 | 7,392 | |||||||||
| Bookings from new awards (“Sales”) | 6,402 | 1,004 | 7,406 | |||||||||
| Cancellations and reductions on existing contracts | (1,870 | ) | (545 | ) | (2,415 | ) | ||||||
| Amounts recognized in revenue upon installation | (2,204 | ) | (494 | ) | (2,698 | ) | ||||||
| Backlog at June 30, 2017 | $ | 7,190 | $ | 2,495 | $ | 9,685 | ||||||
| (in thousands) | Residential | Sunetric | Totals | |||||||||
| Backlog at December 31, 2017 | $ | 10,521 | $ | 2,244 | $ | 12,765 | ||||||
| Bookings from new awards (“Sales”) | 7,168 | 320 | 7,488 | |||||||||
| Cancellations and reductions on existing contracts | (3,068 | ) | (791 | ) | (3,859 | ) | ||||||
| Amounts recognized in revenue upon installation | (2,212 | ) | (295 | ) | (2,507 | ) | ||||||
| Backlog at March 31, 2018 | 12,409 | 1,478 | 13,887 | |||||||||
We typically see an increase in the absolute number of cancellations when sales increase. Nonetheless, our net sales after cancellations more than tripled in the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. Our small business commercial operations (included in our Residential segment) demonstrated especially strong growth as we increased the dedicated small commercial sales team. Further, during the second quarter of 2017, we were awarded two solarize communities in which we will begin selling to homeowners during the third quarter of 2017.
DuringHistorically, we experience higher customer cancellations during the secondfirst quarter of 2017, we increased our average monthly headcount of direct sales representatives by almost 50%. With this rapid growth in our sales headcount we are intently focused on continuing to develop and implement our sales training programs to increase our team’s productivity. We believe that by supporting our growing sales force with statethe calendar year from customers whose systems were not installed before the end of the art sales training programs, we will enableprior year for them to address typicalrealize the benefit of the investment tax credit. We have determined that for optimum internal operations, and customer questions during thesatisfaction, that a backlog equivalent to a few months of sales and installation processes, increasing sales and reducing cancellations.is optimal.
We compete with larger capitalized firms for customers, employees, and the services of third party financiers and installers and, accordingly, there can be no assurance that we will be successful in meeting our goals for increasing sales and revenue.
Backlog is a key metric for us as our goal is to increase our backlog.
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Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies or estimates during the sixthree months ended June 30, 2017March 31, 2018 from those disclosed in our annual report2017 10-K. The adoption of ASC 606 related to revenue recognition has not had a material impact on Form 10-K for the year ended December 31, 2016.our results of operation, financial condition or cash flows.
Results of Operations
Three Months Ended June 30, 2017March 31, 2018 Compared to Three Months Ended June 30, 2016March 31, 2017
Contract revenue:
Sale and installation of solar energy systems. Sale and installation of solar energy system revenue decreased $2.0$0.9 million, or 43.0%24.9%, to $2.7$2.5 million during the three months ended June 30, 2017,March 31, 2018, from $4.8$3.4 million during the three months ended June 30, 2016. The decreaseMarch 31, 2017. This is primarily due to a decreasethe result of the Rhode Island Program reaching its funding cap earlier than expected in the numberfourth quarter of 2017 delaying installations with 0.7 MW installed during the three months ended June 30, 2017 comparedMarch 31, 2018. These projects are projected to 1.1 MWbe installed during the three months ended June 30, 2016. Because our backlog had declined so much until we received funding for growth in February 2017, we have been advising that our installation revenue will lag the sales growth. Because our backlog had declined until we received funding to effectively pursue our revenue growth strategy in February 2017, we predicted that our installation revenue would lag the sales growth, as previously disclosed. We experienced such a lag in the second quarter of 2017, and growing sales and our backlog is a necessary first step to growing installation revenue. It is important to note that as a result of our capital raises of $16 million in February 2017, the second quarter of 2017 is our first full quarter of operating with what we feel is appropriate working capital in place for effectively pursuing our revenue growth strategy.
Service. Service revenue increased $0.2 million, or 108.3%, to $0.3 million during the three months ended June 30, 2017, from $0.1 million during the three months ended June 30, 2016. The increase is primarily due to a contract entered into with a third party in the fourth quarter of 2016 to provide service work on their existing customers.2018.
Contract expenses:
Installation of solar energy systems. Installation of solar energy system expenses decreased $1.5$0.2 million, or 36.1%7.8%, to $2.7$2.8 million during the three months ended June 30, 2017,March 31, 2018, from $4.2$3 million during the three months ended June 30, 2016,March 31, 2017, which is attributable to the reduction ofdecrease in installation revenue. Because we believe that we will enjoy futureThe reduction coincides with our reduction in sales growth, we have continued to maintain our construction crews to meet that anticipated growth. We anticipate that our costand installation of idle time will declinesolar energy systems and gross margin percentage improve, along with revenue growth.
Service.Service expense increased $0.2 million, or 68.7%, to $0.5 million during the three months ended June 30, 2017, from $0.3 million during the three months ended June 30, 2016. The increase is primarilymainly due to the additional costs attributedour not having to purchase panel inventory as a contract entered into with a third partyresult of our ramp up of inventory in the fourth quartersecond half of 20162017 related to provide service workthe Section 201 tariff on their existing customersimported crystalline silicon photovoltaic cells and modules as previously disclosed in our 2017 quarterly and annual filings.
Customer acquisition.Customer acquisition expense increased $0.7$0.2 million during the three months ended June 30, 2017,March 31, 2018, or 115.0%22.3%, to $1.3$1.2 million during the three months ended June 30, 2017March 31, 2018 from $0.6$1 million during the three months ended June 30, 2016.March 31, 2017. This increase is primarily due to increased hiring in our sales department as well as an increase in marketing spend to obtain higher qualitysufficient leads andfor the growing sales organization.
Litigation expense.Litigation expense for the three months ended March 31, 2018 was $0.1 million compared to promote incentive programs in various states in which we operate. We have been working on what has been emerging as an industry issue – controlling customer acquisition costs. Our stated target has been to move more toward digital marketing. These leads are not only more cost effective but we have seen that they also close sales at a higher rate. This is part of our continued focus on moving away from time old tradition of costly paid leads, electing for partnering with lead providers that only get paid when we sign a contract, not just leads.
Operating expense. Operating expenses decreased $0.2 million, or 10.3%, to $2.5$0.08 million during the three months ended June 30, 2017, comparedMarch 31, 2017. The increase was due to $2.7 million duringadditional legal services provided to us related to the three months ended June 30, 2016.
Litigation expense.Litigation expenses duringAlpha Capital Anstalt legal proceedings and settlement of the three months ended June 30, 2017 was $55,000 compared to $0 during the three months ended June 30, 2016.proxy contest. Our legal expenses may increase in subsequent periods. See Note 4,5, Commitments and Contingencies.
Derivative and otherother.. Derivative and other income (loss) duringexpenses was a $0.03 million gain for the three months ended June 30, 2017March 31, 2018 resulting from a fair market value change in the outstanding warrant liability. In comparison, there was $0.01a $0.1 million compared to a loss of $0.6 million duringgain in the three months ended June 30, 2016. The reductionMarch 31, 2017, primarily resulting from a change in the fair market value of stock issued from the 2016 Notes, offset by a decrease in the derivative liability of the 2016 Notes.
Debt accretion and loss duringon extinguishment. During the three months ended June 30,March 31, 2017, was related to the reduction in debt and the conversion of financial derivative instruments.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Contract revenue:
Sale and installation of solar energy systems. Sale and installation of solar energy system revenue decreased $3.5 million, or 36.5%, to $6.1 million during the six months ended June 30, 2017, from $9.6 million during the six months ended June 30, 2016. The decrease is primarily due to a decrease in the number of installations, with 1.6 MW installed during the six months ended June 30, 2017 compared to 2.3 MW installed during the six months ended June 30, 2016. Because our backlog had declined so much until we received funding for growth in February 2017, we have been advising that our installation revenue will lag the sales growth. That occurred in the second quarter of 2017, and growing sales and our backlog is a necessary first step. It is important to note that given our capital raises of $16 million in February this is our first full quarter of operating with what we feel is appropriate working capital in place for growth.
Service. Service revenue increased $0.3 million, or 110.4%, to $0.6 million during the six months ended June 30, 2017 from $0.3 million during the six months ended June 30, 2016. The increase is primarily due to a contract entered into with a third party in the fourth quarter of 2016 to provide service work on their existing customers.
Contract expenses:
Installation of solar energy systems. Installation of solar energy system expenses decreased $2.9 million, or 33.9%, to $5.7 million during the six months ended June 30, 2017, from $8.7 million during the six months ended June 30, 2016, which corresponds to the reduction of installation revenue during this same time comparison.
Service.Service expense increased slightly to $0.8 million during the six months ended June 30, 2017, from $0.6 million during the six months ended June 30, 2016. The increase is primarily due to the additional costs attributed to a contract entered into with a third party in the fourth quarter of 2016 to provide service work on their existing customers.
Customer acquisition.Customer acquisition expense increased $0.8 million during the six months ended June 30, 2017, or 59.0%, to $2.3 million during the six months ended June 30, 2017 from $1.4 million during the six months ended June 30, 2016. This increase is primarily due to increased hiring in our sales department as well as an increase in marketing spend to obtain higher quality leads and to promote incentive programs in various states in which we operate.
Operating expense.Operating expenses decreased $0.3 million, or 5.7%, to $5.4 million during the six months ended June 30, 2017 compared to $5.8 million during the six months ended June 30, 2016.
Litigation expense.Litigation expenses during the six months ended June 30, 2017 was $135,000 compared to $24,000 during the six months ended June 30, 2016. Our legal expenses may increase in subsequent periods. See Note 4, Commitments and Contingencies.
Derivative and other. Derivative and other (loss) during the six months ended June 30, 2017 was a loss of $0.4 million compared to a loss of $0.6principal and $0.1 million duringof accrued interest under the six months ended June 30, 2016. The reduction in loss during the six months ended June 30, 2017 was related to the reduction in debt and conversion2016 Notes were converted into 160,185 shares of financial derivative instruments. The loss on conversion results fromClass A common stock. As the trading price of the Company’sour Class A common stock beingwas higher when convertedat conversion than the effective conversion price per share to the debt holder.holder, we recorded a loss on extinguishment. No such transaction occurred during the three months ended March 31, 2018 resulting in a decrease of $0.5 million.
Seasonality
Our quarterly net revenue and operating results for solar energy system installations are difficult to predict and have, in the past, and may, in the future, fluctuate from quarter to quarter as a result of changes in state, federal, or private utility company subsidies, as well as weather, economic trends and other factors. We have historically experienced seasonality in our solar installation business, with the first quarter representing our lowest installation quarter of the year primarily due to adverse weather. We have historically experienced seasonality in our sales of solar energy systems, with the fourth and first quarters of the year beingseeing less sales orders than the second and third quarters.
Liquidity and Capital Resources
We have experienced recurring operating losses and negative cash flow from operations in recent years. Starting with the fourth quarter of 2014, we implemented measureswhich have necessitated: (i) developing plans to reduce our cash outflow for operations such that the required level of salesgrow revenue to achieve break-even results was reduced. These measures included (i) exiting the large commercial segment which was operating at both an operating andgenerate positive cash flow loss,and (ii) reducing staffing levels, (iii) physically exiting the California market where its costsraising additional capital. No assurances can be given that we will be successful with our plans to operate were high, (iv) focusing on cash sales to customersgrow revenue for profitable operations or, if necessary, raising additional capital. See Note 6. Shareholders Equity, Note 7. Convertible Note and not leasing to customers, (v) negotiating lower costsNote 13. Subsequent Events for equipment, and (vi) operating initiatives designed to improve profitability such as reducing the length of cycle time for customer installations and lowering the cost of marketing. We repaid in full and terminated our line-of-credit facilitytransactions raising capital during the first quarter of 2017 as our working capital was sufficient for current operations. See Note 3, Line of Credit. We believe there are sufficient financial resources to operate for the ensuing 12 months.2018 and 2017.
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Our plans to grow revenue are:
| · | Invest in the POWERHOUSE™ license by obtaining UL certification for POWERHOUSE™ 3.0, a prerequisite for commercialization of the product and, upon achieving UL certification, manufacture, market and sell POWERHOUSE™ 3.0 to roofing companies and new home builders; |
| · | Leverage the POWERHOUSE™ brand to generate leads and revenue for the Residential and Sunetric segments; |
| · | Leverage our investment in RGS 365™ customer-centric software for the POWERHOUSE™ and Solar Divisions; |
| · | Expand our digital marketing program to generate customer leads while achieving our desired cost of acquisition; |
| · | Make available to our customers additional third-party providers to finance customer acquisitions of our solar energy systems; and |
| · | Expand our network of authorized third-party installers. |
During February 2018, we completed a strategic realignment to scale back our residential solar homeowner business. While we have made progress during 2017 in growing solar sales and backlog, growth has not met initial expectations. The historical operating losses have required usrealignment reduced the number of outside sales personnel. We plan to raise financial capital. Duringmaintain the fourth quarterareas of 2016, we raised $16.1 million of financial capital, net of costscore competencies meeting expectations, such as its e-sales call center and an additional $16.0 million of financial capital, net of costs during the first quarter of 2017. See Note 5, Shareholders’ Equity. We used the proceeds from the financial capital raised to reduce accounts payable, purchase materials to convert backlog to revenue and begin to execute our revenue growth strategy. The 2017 capital raises enabled us to terminate our line-of-credit facility and a Supply Agreement which had a coterminous term, resulting in a reduction of costs for materials.commercial sales organization.
Until we are successful in implementing our plans to increase revenue growth strategy,for profitable operations, we expect to have a cash outflow from operating activities. We expect to obtain UL certification for POWERHOUSE™ 3.0 in 2018 and, if we determine to proceed at that time with the commercialization of POWERHOUSE™, we expect to have cash outflow from operating activities. In addition,activities for commercialization of POWERHOUSE™, including the remaining “Initial License” payment of $2 million, prepayments with supply chain manufacturers and working capital as sales of the product commence.
The accompanying consolidated financial statements have been prepared on a basis that assumes we will continue as a going concern and contemplates the continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have experienced a history of operating losses and have an accumulated deficit of approximately $204.8 million at March 31, 2018. During the three months ended March 31, 2018, we generated a net loss of approximately $4.3 million and we expect that we will havecontinue to generate operating losses until sales are increased and we subsequently recognize an increase in installation revenue. At March 31, 2018, our consolidated cash outflow from operating activitiesbalance was approximately $0.3 million.
To provide funds to grow our revenue, on March 30, 2018, we entered into the Securities Purchase Agreement for the remainder2018 Note Offering (as defined and further described in Note 7. Convertible Debt). 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 we received approximately $5 million of the yearproceeds and Investor Notes (as defined and further described in Note 7. Convertible Debt) in an aggregate amount of $5 million secured by cash and/or securities held in investor accounts. Investors are required to prepay the Investor Notes as they convert their Series B Notes (as defined and further described in Note 7. Convertible Debt) issued in the 2018 Note Offering and, upon satisfaction of Equity Conditions and certain other conditions, upon the occurrence of a specified mandatory prepayment event. The 2018 Notes (as defined and further described in Note 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 of Class A common stock at maturity, we 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 after reducing the exercise price of common stock warrants to induce conversion. No assurances can be given that should a balance remain on the 2018 Notes at maturity, we will utilize cashbe successful in meeting the obligation under the 2018 Notes.
We believe that without determining to increase revenue by (i)proceed with the commercialization of POWERHOUSE™ 3.0 we have sufficient capital resources for the ensuing 12 months. If we determine to proceed with commercialization of POWERHOUSE™ 3.0, we will require additional capital which could be met from the Investor Notes. In the event capital from the Investor Notes are not received, we would seek obtaining the capital from other transactions such as a private or public offering of securities, and common stock warrant exercises including reducing the exercise price of common stock warrants to induce conversion. No assurances can be given that should we determine to proceed with commercialization of POWERHOUSE™ 3.0, we will have available to us the additional capital necessary, either from the Investor Notes or an alternative transaction. Other than the uncertainties regarding our ability to obtain additional funding, an anticipated level of rooftop installations for customers, (ii) expandingthere are currently no known trends, demands, commitments, events or uncertainties that are likely to materially affect our e-sales and field sales organizations and (iii) increasing our marketing spend for lead generation.liquidity.
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The following table shows the number of outstanding warrants, the associated exercise prices. We do not control when the investors exercise their warrants, and, accordingly, there can be no assurance that the investors will exercise any warrants or whether we would receive any cash from the exercise of these warrants.
| Number of | ||||
| Exercise Price | Warrants | |||
| $ 1.270 | 616,731 | |||
| $ 1.360 | 8,302 | |||
| $ 2.400 | 1,800,000 | |||
| $ 3.100 | 3,710,000 | |||
| $ 3.125 | 120,000 | |||
| $ 3.875 | 185,500 | |||
| $ 8.250 | 30,834 | |||
| Greater than $45.000 | 56,590 | |||
| Total | 6,527,957 | |||
Warrant holders have the option of cashless exercise
Cash Flows
The following table summarizes our primary sources (uses) of cash during the periods presented:
| For the Six Months Ended June 30, | For the Three | |||||||||||||||
| (in thousands) | 2017 | 2016 | ||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||
| Operating activities – continuing operations | $ | (8,326 | ) | $ | (5,328 | ) | ||||||||||
| Operating activities – discontinued operations | (38 | ) | 213 | |||||||||||||
| Months Ended March 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Net cash (used in) provided by: | ||||||||||||||||
| Operating activities - continuing operations | $ | (2,657 | ) | $ | (4,030 | ) | ||||||||||
| Operating activities - discontinued operations | 198 | (122 | ) | |||||||||||||
| Operating activities | (8,364 | ) | (5,115 | ) | (2,459 | ) | (4,152 | ) | ||||||||
| Investing activities | (370 | ) | 9 | (68 | ) | (250 | ) | |||||||||
| Financing activities | 15,539 | 5,002 | 1,660 | 15,539 | ||||||||||||
| Net increase (decrease) in cash | $ | 6,805 | $ | (104 | ) | $ | (867 | ) | $ | 11,137 | ||||||
Continuing Operations
Operating activities. Cash outflow from operations forOur operating activities used net cash of $2.7 million and $4.0 million during the six-month periodthree months ended June 30,March 31, 2018 and 2017, increased $3.2 million asrespectively. The change in cash outflows compared to the six-month period ended June 30, 2016. This increase was primarilyprior year is principally due to (i) an increase intiming of vendor payments on prior obligations, (ii) an increase in customer acquisition expenses of $0.9 million to begin the revenue growth strategy, (iii) an increase in prepayments of $0.5 million and (iv) a reduction in gross margin of $0.4 million arising from the reduction in revenue. Our net cash used in operating activities during the six months ended June 30, 2016 was due to our net loss decreased by noncash items of $1.0 million and a net decrease in working capital assets and liabilities of $1.0 million.payments.
Investing activities. During the sixthree months ended June 30, 2017,March 31, 2018, we received proceedsincurred $0.06 million of $2,000charges related to our investment in obtaining UL certification for the sale of equipment, and purchased equipment of $372,000. During the six months ended June 30, 2016, we received proceeds of $9,000 for the sale of equipment.POWERHOUSE™.
Financing activities. Our financing activities provided net cash of $15.5$1.7 million and $5.0$15.5 million during the sixthree months ended June 30,March 31, 2018 and 2017, and 2016, respectively. Our net cash provided by financing activities during the sixthree months ended June 30,March 31, 2018 reflected net proceeds of $1.7 million from exercise of warrants and issuance of common stock and warrants related to the January 2018 offering. Our net cash provided by financing activities during the three months ended March 31, 2017 reflected the net proceeds $0.2 million from the conversion of debt related to the offering of 2016 Note Offering,Notes and net proceeds of $16.0 million from the issuance of common stock during theand warrants in our February 2017 offerings, offset by repayment of our line-of-credit facility of $0.7 million. Our net cash provided by financing activities during the six months ended June 30, 2016 reflected the net proceeds received from the 2016 Note Offering of $1.5 million and additional borrowings on our line of credit of $3.5 million.
Discontinued Operations
Operating activities. Our operating activities usedprovided net cash of $38,000$0.1 million and provided $0.2used $0.1 million during the sixthree months ended June 30,March 31, 2018 and 2017, and 2016, respectively. The cash used by discontinued operations during the six months ended June 30, 2017 was primarily due to legal fees as compared to the six months ended June 30, 2016 where cash provided was attributable to the continued wind-down of remaining commercial projects.
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other limited purposes and as a result we do not have and are not reasonably likely to have future off-balance sheet arrangements.
Risk Factors
We caution that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward-looking statements that, from time-to-time, we make in filings with the U.S. Securities and Exchange Commission,SEC, news releases, reports, proxy statements, registration statements and other written communications as well as oral forward-looking statements made by our representatives. These risks and uncertainties include, but are not limited to, those risks set forth in Part II, Item 1A of this and other quarterly reports and listed in the section entitled “RISK FACTORS” in our Annual Report on Form2017 10-K, for the year ended December 31, 2016 which is on file with the U.S. Securities and Exchange Commission.SEC. Except for the historical information contained herein, the matters discussed in this analysis are forward-looking statements that involve risk and uncertainties, including, but not limited to, general economic and business conditions, competition, pricing, brand reputation, consumer trends, and other factors which are often beyond our control.
The risks and uncertainties we have described are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. We do not undertake any obligation to update forward-looking statements except as required by law.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
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| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our chief executive officer and principal financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act.Act of 1934, as amended. Based upon their evaluation as of June 30, 2017,March 31, 2018, they have concluded that those disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the three months ended June 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 1. | Legal Proceedings |
From time to time, we arethe Company may be involved in legal proceedings that we considerare considered to be in the normal course of business.
As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the first quarter of 2017, onOn 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 Capital filed an amended complaint removing the securities and fraud-related claims and leaving only breach of contract claims against the Company. The Company does not expect to incur any material charges in connection with this lawsuit and, as of June 30, 2017,Because the Company has not recorded a liability associated with this lawsuit. However,been unwilling to entertain settlement discussions, Alpha has recently deposed members of the Company expects its litigation expense to increaseand the Company’s legal team that represented the Company in the near future as a result thereof.
On May 1, 2017, Roth Capital Partners, LLC requested indemnification byoffering. The discovery period of the suit has ended and the Company filed a motion for its legal expenses relatedsummary 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 this lawsuit underprepare a pretrial order with respect to the termsremaining portions of the Placement Agency Agreement associated withbreach of contract claim. Separately, the February 6, 2017 offering. The Company, underdistrict court granted Roth’s motion for summary judgment in its entirety, dismissing Roth from the circumstances, disputescase. Finally, the requestdistrict court denied Alpha’s motion for indemnification.summary judgment in its entirety.
| Item 1A. | Risk Factors |
Except for the risk factor appearing below, there
There have been no material changes from the risk factors disclosed in Item 1A of the Company’s Annual2017 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As previously reported on April 9, 2018, we issued an aggregate of $10.75 million principal amount and $10 million of funding amount of 2018 Notes. The terms of the 2018 Notes are convertible at any time, at the option of the holders, into shares of our Class A common stock at the lower of a fixed and floating conversion price and mature in 12 months, at which time any outstanding balance plus interest is due. The conversion features and terms of the 2018 Notes are described in our Current Report on Form 10-K for the fiscal year ended December 31, 2016.8-K filed on April 10, 2018 and these descriptions are incorporated herein by reference.
Our operations are largely dependent on the skill and experience of our management and key personnel. The loss of management and other key personnel or our inability to hire additional personnel could significantly harm our business and our ability to expand, and we may not be able to effectively replace members of management who have left the company.
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Our continued success and our ability to maintain our competitive position is largely dependent upon, among other things, the efforts and skills of our senior executives and management team. We have not paid bonuses in over two years and do not have a significant amount of employee stock options or other equity incentive awards available to issue. If we are unable to pay bonuses or issue stock options or other equity incentive awards in the future, we may lose the services of members of our management team or other key personnel, and our business may be significantly impaired. In addition, we cannot assure you that we will be able to attract additional qualified senior executive and management personnel.
An increase in our cost of materials could arise if the United States imposes trade remedies on imported crystalline silicon photovoltaic cells and modules.
In April 2017, Suniva, a US-based manufacturer of solar panels in bankruptcy, filed a safeguard petition under Section 201 of the Trade Act of 1974 requesting that the U.S. International Trade Commission recommend that the President impose trade remedies on imported crystalline silicon photovoltaic cells and modules in the form of an initial duty rate on imported solar cells of $0.40/watt and an initial minimum price on imported solar modules of $0.78/watt. The potential threat of increased costs on modules is causing shortages within the marketplace as developers and contractors build up their supply of panels, rather than risk a price increase in the future, and may affect our revenue in future periods.
| Item 6. | Exhibits. |
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| Exhibit No. | Description | |
| 31.1* | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | |
| 31.2* | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | |
| 32.1** | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2** | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS** | XBRL Instance Document | |
| XBRL Taxonomy Extension Schema | ||
| XBRL Taxonomy Extension Calculation Linkbase | ||
| XBRL Taxonomy Extension Definition Linkbase | ||
| XBRL Taxonomy Extension Label Linkbase | ||
| XBRL Taxonomy Extension Presentation Linkbase |
| * | Filed herewith |
| ** | Furnished herewith |
| † | Indicates management contract or compensatory plan or arrangement. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
| Real Goods Solar, Inc. | |||||||
| (Registrant) | |||||||
| Date: | May 11, 2018 | By: | /s/ Dennis Lacey | ||||
| Dennis Lacey | |||||||
Chief Executive Officer and Director
| |||||||
| (Authorized Officer) | |||||||
| Date: | May 11, 2018 | By: | /s/ Alan Fine | ||||
| Alan Fine | |||||||
Chief Financial Officer and Treasurer (Principal Financial Officer) | |||||||
| Date: | May 11, 2018 | By: | /s/ | |||
| Principal Accounting Officer and Controller |
EXHIBIT INDEX
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