| Use of Proceeds from offering by selling shareholders | We will not receive any proceeds from the sale of shares of Common Stock issuable upon exercise of the Private Warrants, but we will receive the exercise price of such warrants if they are exercised (unless exercised by means of a “cashless exercise,” in which case we will not receive any exercise price). See the section entitled “Use of Proceeds” beginning on page 24 of this prospectus. (1)
| | | Plan of Distribution for the offering by the selling shareholders | The Pro Forma column presents our consolidated results of operations giving pro forma effect toselling shareholders and their pledgees, donees, transferees, or other successors in interest may offer the acquisitions of Marin Solar and Carlson Solar as if such transactions had occurred on January 1, 2007. |
(2)
| Net income per share is calculated as if Gaiam had transferred our business assets and operations to us in return for 10,000,000 shares of Common Stock issuable under the Private Warrants in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale, at negotiated prices, or in trading markets for our Class B common stockCommon Stock.
See the section entitled “Plan of Distribution” beginning on January 1, 2003. We did not exist aspage 33 of this prospectus for a separate company duringcomplete description of the historical periods presented. We computed earnings per share based onmanner in which the shares outstanding following this contribution as if such shares were outstanding from the beginning of the periods presented.registered hereby may be distributed. |
| | | | | | | | | | | | | | | | As of December 31, 2007 | | | (in thousands) | | Actual(1) | | | Pro Forma(1) | | | Pro Forma
As Adjusted(2) | | | | | | | | (unaudited) | | Consolidated Balance Sheet Data: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 542 | | | $ | 542 | | | $ | | | Working capital (deficit) | | | (11,266 | ) | | | (13,488 | ) | | | | | Deferred tax assets | | | 2,478 | | | | 2,478 | | | | — | (3) | Total assets | | | 20,986 | | | | 25,371 | | | | | | Deferred tax liabilities | | | — | | | | — | | | | 279 | (3) | Payable to Gaiam | | | 16,286 | | | | 19,822 | | | | | | Minority interest | | | — | | | | 371 | | | | | | Total liabilities | | | 19,336 | | | | 23,350 | | | | | | Total shareholders’ equity | | | 1,650 | | | | 1,650 | | | | | |
(1)
| The Actual column
| | Common Stock outstanding before the offerings described above | 109,639,125 shares as of December 31, 2007 reflects our acquisition of Marin Solar. The Pro Forma column as of December 31, 2007 reflects our consolidated balance sheet giving pro forma effect to our new corporate structure and the acquisition of Carlson Solar as if those events had occurred on December 31, 2007. Our new corporate structure reflects the contribution to us by Gaiam of our business assets and operations in exchange for 10,000,000 shares of our Class B common stock. See “Unaudited Pro Forma Consolidated Financial Information” for further information regarding the pro forma adjustments. |
(2)
| The Pro Forma As Adjusted column reflects the sale ofApril 29, 2019 (including 736,374 shares of Class A common stock by usissued under previously exercised Series S Warrants)
| | | | Market for our Common Stock and Symbol | The OTCQX, symbol “RGSE” | | | | Risk Factors | Investing in this offering at an assumed initial public offering priceour Common Stock involves a high degree of $ per share,risk. See the midpoint of the range indicatedsection entitled “Risk Factors” beginning on the cover page 5 of this prospectus after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and after giving effect to our receipt of the estimated net proceeds. A $1.00 increase (decrease)under similar headings in the assumed public offering price of $ per share would increase (decrease) each of cashother documents that are filed after the date hereof and cash equivalents, working capital (deficit), total assets and total shareholders’ equityincorporated by $ million, assuming the number of shares offered by us, as set forth on the cover page ofreference into this prospectus, remainstogether with the same and after deducting underwriting discounts and commissions and estimated offering expenses payableother information included in or incorporated by us.reference into this prospectus before deciding whether to invest in our Common Stock. |
(3)
| After the date we cease to be a member of Gaiam’s consolidated group for federal income tax purposes, to the extent we become entitled to utilize loss carryforwards from our separate tax returns, we will distribute to Gaiam the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. Accordingly, we expect to recognize a valuation allowance against certain of our deferred tax assets resulting in a net deferred tax liability upon completion of this offering.
|
Risk factors
An investment in our Class A common stock offered by this prospectussecurities involves a substantial riskhigh degree of loss. Yourisk. Before making an investment decision you should carefully read and consider thesethe risks factors,described below, together with all of the other information included or incorporated by reference in this prospectus, before you decide to purchase sharesincluding, without limitation, the risk factors in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K, which are on file with the SEC. If any of our Class A common stock. We believe the risks and uncertainties described below are thelisted in our most significant ones we face. The occurrence ofrecent Annual Report on Form 10-K or any of the following factorsrisks actually occur, our business, financial condition, and/or results of operations could harm our business.suffer. In that case, the tradingmarket price of our Class A common stockCommon Stock could decline, and you couldmay lose all or part of your investment. You should read the section entitled “Special Note Regarding Forward-Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus. Additional risks and uncertainties that we do not presently known to usknow or that we currently deem immaterial couldmay also impairhave a material adverse effect on our operations.business. Risks Related to the Offering
Management will have broad discretion as to the use of the net proceeds from this offering, and Real Goods Solar may not use the proceeds effectively. Management will have broad discretion as to the application of the net proceeds from this offering. Our shareholders may not agree with the manner in which management chooses to allocate and spend the net proceeds. Moreover, management may use the net proceeds for corporate purposes that may not increase our profitability or market value. Warrant holders who exercise the Warrants may experience immediate and substantial dilution The exercise price of the Warrants associated with the shares of Common Stock offered pursuant to this prospectus may be substantially higher than the net tangible book value per share of Common Stock. In that situation, if you exercise your Warrant, you will incur immediate and substantial dilution in the net tangible book value per share of Common Stock from the exercise price you pay. Moreover, we have a substantial number of stock options and warrants to purchase Common Stock outstanding. If the holders of outstanding options or warrants exercise those options and warrants at prices below the exercise price you paid, you will incur further dilution. The exercise prices are not indications of our value. The exercise prices of the Warrants may not necessarily bear any relationship to the book value of our assets, past operations, cash flows, losses, financial condition or any other established criteria for value. You should not consider the exercise price as an indication of the value of the Common Stock underlying the Warrants. After the date of this prospectus, the Common Stock may trade at prices above or below such exercise prices. The public trading market for the Common Stock may be limited in the future. Effective February 15, 2019, the Common Stock is quoted on the OTCQX under the symbol “RGSE.” Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. Prior to such date, the Common Stock traded on the Nasdaq Capital Market under the same symbol. The trading volume for the Common Stock fluctuates and, in the past, there have been time periods during which the Common Stock trading volume has been limited. Management can make no assurances that trading volume will not be similarly limited in the future. Without an active trading market, there can be no assurance of any liquidity or resale value of the Common Stock, and shareholders may be required to hold shares of the Common Stock for an indefinite period of time. Risk Factors Related to Ourour Business and Our Industry Our business prospects could
We have a history of operating losses, and it is uncertain when, or if, we may be harmed if solar energy isable to achieve or sustain future profitability. If we do not widely adopted or sufficient demand for solar energy systems does not develop or takes longer to develop than we anticipate. The solar energy market is at a relatively early stage of development, and the extent to which solar energy will be widely adopted and the extent to which demand for solar energy systems will increase are uncertain. If solar energy does not achieve widespread adoption or demand for solar energy systems fails to develop sufficiently,become profitable on an ongoing basis, we may be unable to growcontinue our business atoperations.
We have incurred net losses and have an accumulated deficit of $243 million as of December 31, 2018. If we cannot improve our operating results and ultimately generate net income, we may be unable to continue our operations in the ratefuture. Our financial statements as of December 31, 2018 were prepared under the assumption that we desire. In addition, demand for solar energy systemswill continue as a going concern. The independent registered public accounting firm that audited our 2018 financial statements, in their report, included an explanatory paragraph referring to our recurring losses and expressed substantial doubt in our targeted markets mayability to continue as a going concern. Management also concluded that substantial doubt exists in our ability to continue as a going concern, and our financial statements do not developinclude any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern depends on our ability to obtain additional equity or may developdebt financing, increase sales and installations, attain further operating efficiencies, reduce expenditures, and ultimately, to generate revenue. We need to successfully commercialize POWERHOUSE™ or increase our sales, installations and revenue in order to achieve our goal of operating profitability. Our current levels of sales, installations and revenue are insufficient for profitable operations. We believe we must commercialize POWERHOUSE™ 3.0, the principle component of our revenue growth strategy, to achieve our goal of operating profitably. Alternatively, we must increase our sales, installations and revenue in our Solar Division to achieve our goal of operating profitably. If we are unsuccessful in executing these plans, we will be unable to increase revenue and will not achieve our goal of operating profitability. We have a lesser extenthistory of negative cash flows from operations, and it is uncertain when, or more slowly thanif, in the future we anticipate. Many factors may affectwill be able to achieve or sustain positive cash flow from operations. There can be no assurance in the demand for solar energy systems, including the following:future that we will generate sufficient cash flow from operations or obtain funds from future financings or other sources to fund operations or other liquidity needs which could have important adverse consequences to us, such as: | | · | Ølimiting our ability to obtain additional financing; | | | fluctuations·
| making it more difficult for us to satisfy our obligations with respect to future indebtedness; | | · | limiting our ability to respond to changing business, industry and economic conditions and to withstand competitive pressures, which may affect our financial condition; | | · | limiting our ability to make investments, dispose of assets, pay cash dividends or repurchase stock; | | · | increasing our vulnerability to downturns in economicour business, our industry or the general economy and market conditions that affect the viability of conventionalrestricting us from making improvements or acquisitions or exploring business opportunities; and non-solar renewable energy sources, such as increases or decreases in the price of oil and other fossil fuels; | | · | placing us at a competitive disadvantage to competitors with greater resources. |
| Ø | | availability of government subsidies and incentives to support the development of the solar energy industry;
Our future operating performance and our ability to service indebtedness will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. |
| Ø | | cost-effectiveness, performance and reliability
Existing rules, regulations and policies pertaining to electricity pricing and technical interconnection of customer-owned electricity generation and changes to these regulations and policies may deter the purchase and use of solar energy systems compared with conventional and other non-solar renewable energy sources and products; |
| Ø | | success of other renewable energy generation technologies, such as hydroelectric, wind, geothermal, solar thermal, concentrated solar and biomass;
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| Ø | | fluctuations in expenditures by purchasers of solar energy systems, which tend to decrease in slower economic environments and periods of rising interest rates; and
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| Ø | | deregulation of the electric power industry and the broader energy industry.
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A drop in the retail price of conventional energy or non-solar renewable energy sources may negatively impact our business.
The demand for our solar energy systems depends in partand negatively impact development of the solar energy industry.
The market for solar energy systems is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies adopted by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. For example, the vast majority of states have a regulatory policy known as net energy metering, or “net metering”, which allows our customers to interconnect their on-site solar energy systems to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar energy system that is exported to the grid and not consumed on-site. In this way, the customer pays for the net energy used or receives a credit at the retail rate if more electricity is produced than consumed. In some states, net metering is being replaced with lower credits for the excess electricity sent onto the grid from solar energy systems, and utilities are imposing minimum or fixed monthly charges on the price of conventional energy, which affects return on investment resulting from the purchaseowners of solar energy systems. FluctuationsThese regulations and policies have been modified in economicthe past and market conditionsmay be modified in the future in ways that impactcan restrict the pricesinterconnection of conventionalsolar energy systems and non-solar renewabledeter purchases of solar energy sources,systems by customers. In addition, electricity generated by solar energy systems competes most favorably in markets with tiered rate structures or peak hour pricing that increase the price of electricity when more is consumed. Modifications to these rate structures by utilities, such as decreases inreducing peak hour or tiered pricing or adopting flat rate pricing, could require the pricesprice of oil and other fossil fuels, could cause the demand for solar energy systems to decline, which would have a negative impact on our business. Changesbe reduced in order to compete with the price of utility electric rates could also have a negative effect on our business. Risk factorsgenerated electricity.
The reduction, elimination or expiration of government subsidies and economic incentives for solar energy systems could reduce the demand for our products.products and services. Government subsidies are an important factor
U.S. federal, state and local government bodies and utilities provide incentives to end-users, distributors, system integrators and manufacturers of solar energy systems to promote solar electricity in the economic determination to purchase a solar energy system. Certain states, including Californiaform of rebates, tax credits and Colorado, localities and utilities offerother financial incentives to offset a portion of the cost of qualified solar energy systems. These incentives can take many forms, including direct rebates, state tax credits,such as system performance payments and payments for renewable energy credits associated with renewable energy generation. These incentives enable us to lower the price we charge our customers for solar energy systems. However, these incentives may expire on a particular date, end when the allocated funding is exhausted, or RECs.be reduced or terminated as solar energy adoption rates increase. These reductions or terminations often occur without warning. In addition, applicable authorities may adjust or decrease incentives from time to time or include provisions for minimum domestic content requirements or other requirements to qualify for these incentives. The reduction, elimination or eliminationexpiration of such incentives or delays or interruptions in the implementation of favorable federal or state laws could substantially increase the cost of our systems to our customers, resulting in a significant reduction in demand for our solar energy systems, which would negatively impact our business.
Existing regulations, and changes to such regulations, may present technical, regulatory and economic barriers to the installation of solar energy systems, which may significantly reduce demand for our solar energy systems. The installation of solar energy systems is subject to oversight and regulation under local ordinances; building, zoning and fire codes; environmental protection regulation; utility interconnection requirements for metering; and other rules and regulations. We attempt to keep up-to-date abouton these requirements on a national, state and local level and must design and install our solar energy systems to comply with varying standards. Certain citiesjurisdictions may have ordinances that prevent or increase the cost of installation of our solar energy systems. In addition, new government regulations or utility policies pertaining to the installation of solar energy systems are unpredictable and may result in significant additional expenses or delays, which could cause a significant reduction in demand for solar energy systems.
Existing regulations and policies pertaining to electricity pricing and technical interconnectionAn increase in our cost of customer-owned electricity generation and changes to these regulations and policies may deter the purchase and use of solar energy systems and negatively impact developmentmaterials could arise as a result of the United States imposing trade remedies on imported solar energy industry.panels, cells, inverters, batteries or other products related to our business.
During 2018, the United States and China each imposed new tariffs on various products imported from the other country. The U.S. tariffs include an additional 25% tariff on solar panels and cells that are manufactured in China and a tariff on inverters, certain batteries and other electrical equipment currently set at 25% effective January 1, 2019. The United States also has, from time to time, imposed, or announced tariffs on goods imported from other countries we use in our business. We cannot predict what actions may ultimately be taken with respect to tariffs or trade relations between the United States and other countries, what products may be subject to such actions, or what actions may be taken by the other countries in retaliation. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact our supply chain, our costs, our suppliers, and the U.S. economy, which could in turn adversely affect our business, financial condition and results of operation. An increase in our cost of materials could arise as a result of changes in the price of oil and the foreign currency exchange rate for Chinese yuan. The marketbaseplate of our POWERHOUSE™ in-roof solar shingle is plastic and, accordingly, changes in the price of oil will affect our cost of this material. Currently, we purchase the solar laminate for our POWERHOUSE™ in-roof solar shingle from a Chinese manufacturer, and, accordingly, changes in the Chinese yuan verses the US Dollar will affect our cost of this material. Although currently there is no shortage of supplies for solar energy systems, is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies adopted by electric utilities. These regulations and policies often relatefrom time to electricity pricing and technical interconnection of customer-owned electricity generation. For example, there currently exist metering caps in certain jurisdictions, which limit the aggregate amount of power that may be sold by solar power generators into the electric grid. These regulations and policies have been modifiedtime in the past, shortages have occurred and may be modifiedhave impacted solar companies such as us. Shortages in the futuresupply of silicon and inverters or supply chain issues could adversely affect the availability and cost of the solar photovoltaic modules used in ways thatour solar energy systems. Shortages of silicon and inverters or supply chain issues could deter purchasesadversely affect the availability and cost of our solar energy systems. Manufacturers of photovoltaic modules depend upon the availability and pricing of silicon, one of the primary materials used in photovoltaic modules. The worldwide market for silicon from time to time experiences a shortage of supply, which can cause the prices for photovoltaic modules to increase and supplies to become difficult to obtain. While we have been able to obtain sufficient supplies of solar energy systems and investmentphotovoltaic modules to satisfy our needs to date, this may not be the case in the researchfuture. Future increases in the price of silicon or other materials and developmentcomponents could result in an increase in costs to us, price increases to our customers or reduced margins. Other international trade conditions such as work slowdowns and labor strikes at port facilities or major weather events can also adversely impact the availability and price of solar photovoltaic modules.
Our business prospects could be harmed if solar energy technology. For example, without a mandated regulatory exceptionis not widely adopted or sufficient demand for solar energy systems utility customers are often charged interconnectiondoes not develop or standby feestakes longer to develop than we anticipate. The solar energy market is at a relatively early stage of development. The extent to which solar energy will be widely adopted and the extent to which demand for putting distributed power generation on the electric utility grid. Such fees could increase the cost to our customers of using solar energy systems will increase are uncertain. If solar energy does not achieve widespread adoption or demand for solar energy systems fails to develop sufficiently, we may be unable to achieve our revenue and make them less desirable, thereby harmingprofit targets. In addition, demand for solar energy systems in our business, operating results and financial condition. Changestargeted markets may not develop or may develop to a lesser extent or more slowly than we anticipate. Many factors may affect the demand for solar energy systems, including the following: | · | availability of government and utility company subsidies and incentives to support the development of the solar energy industry; |
| · | government and utility policies regarding the interconnection of solar energy systems to the utility grid; |
| · | fluctuations in economic and market conditions that affect the viability of conventional and non-solar renewable energy sources, such as changes in the price of natural gas and other fossil fuels; |
| · | cost-effectiveness (including the cost of solar panels), performance and reliability of solar energy systems compared with conventional and other non-solar renewable energy sources and products; |
| · | success of other renewable energy generation technologies, such as hydroelectric, wind, geothermal, solar thermal, concentrated solar and biomass; |
| · | availability of customer financing with economically attractive terms; |
| · | fluctuations in expenditures by purchasers of solar energy systems, which tend to decrease in slower economic environments and periods of rising interest rates and tighter credit; and |
| · | deregulation of the electric power industry and the broader energy industry. |
A drop in net metering policies could also deterthe retail price of conventional electricity or non-solar renewable energy sources may negatively impact our business. The demand for our solar energy systems depends in part on the price of conventional electricity, which affects return on investment resulting from the purchase and use of solar energy systems. In addition, electricity generated by solarFluctuations in economic and market conditions that impact the prices of conventional and non-solar renewable energy systems competes primarily with expensive peak hour electricity rates rather than withsources could cause the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities, such as to a flat rate, would requiredemand for solar energy systems to achieve lower pricesdecline, which would have a negative impact on our business.
Our sales and installations are subject to seasonality of customer demand and weather conditions which are outside of our control. Our sales are subject to the seasonality of when customers buy solar energy systems. We historically have experienced spikes in orderorders during the spring and summer months which, due to compete withlead time, result in installations and revenue increasing during the pricesummer and fall. Tax incentives can generate additional backlog prior to the end of electricity.the year, depending upon the incentives available and whether customers are looking to take advantage of such incentives before the end of the year.
Our ability to construct systems outdoors may be impacted by inclement weather, which can be most prominent in our geographic installation regions during the first and fourth quarters of the year. As a result of these factors, our first quarter is generally our slowest quarter of the year. If unexpected natural events occur and we are unable to manage our cash flow through these seasonal factors, there could be a negative impact on our financial position, liquidity, results of operations and cash flow.
Our inability to respond to changing technologies and issues presented by new technologies could harm our business. The solar energy industry is subject to technological change. If we rely on products and technologies that are notcease to be attractive to customers, or if we are unable to respond appropriately to changing technologies and changes in product function andor quality, we may not be successful in capturing or retaining a significant market share. In addition, any new technologies utilized in our solar energy systems may not perform as expected or as desired, in which event our adoption of such products or technologies may harm our business. Risk factorsWe may be unable to successfully commercialize POWERHOUSE™ 3.0, which may negatively impact our business and results of operation.
There are risks we must address to successfully commercialize POWERHOUSE™ 3.0:
| · | The adequacy of, and access to, capital necessary to commercialize POWERHOUSE™ 3.0; |
| · | Our ability to satisfy the conditions and our obligations under the License; |
| · | Our ability to grow a nationwide network of local roofers and solar installers to purchase POWERHOUSE™ solar shingles; |
| · | Our ability to contract with homebuilders to purchase POWERHOUSE™ solar shingles for their communities; |
| · | Our ability to manage a supply chain, including the cost and availability of raw materials, in order to achieve production levels and competitive pricing of the POWERHOUSE™ 3.0 shingles; |
| · | Our ability to successfully expand operations and realize profitable revenue growth from the sale and installation of POWERHOUSE™ 3.0; |
| · | Our ability to successfully and timely expand our POWERHOUSE™ 3.0 business outside of the United States and manage foreign exchange risks associated with the POWERHOUSE™ 3.0 business; |
| · | Intellectual property infringement claims, and warranty claims related to the POWERHOUSE™ 3.0 business; and |
| · | Competition in the built-in photovoltaic solar system business. |
We derive allOur License with Dow for the exclusive use of the revenue fromPOWERHOUSE™ trademark name is subject to our selling of 50 megawatts of POWERHOUSE™ 3.0 in-roof shingle within the first 5 years and failure to do so could adversely affect our business, financial condition and results of operation.
If we do not sell 50 megawatts of POWERHOUSE™ 3.0 in-roof shingles during the first 5 years after obtaining UL certification, Dow has the right to amend the License to be non-exclusive. If that were to happen, Dow would be allowed to grant rights to others to sell POWERHOUSE™ 3.0 in-roof solar shingles and use associated intellectual property, thereby increasing competition, which could adversely affect our business, financial condition and results of operation.
Our Solar Division operates in a highly competitive market with low barriers to entry and, accordingly, we may face the loss of business or reduced margins. The solar energy integration servicessystem installation market is highly competitive with low barriers to entry. We currently compete with significantly larger companies as well as a large number of relatively small installers and developers. Larger companies may have greater financial, technical and marketing resources and greater name recognition than we do. Smaller companies may lack adequate systems and capital but can benefit from sales in two states.operating efficiencies or from having lower overhead, which enables them to offer lower prices. We currently derive all of the revenue frombelieve that our solar energy integration services from projects in the states of California and Colorado. The growth of our business will require usSolar Division’s ability to expand our operations in California and Colorado and to commence operations in other states. Our success may dependcompete depends in part on our ability to continue to make successful acquisitions.
As parta number of factors outside of our business strategy, we plan to expand our operations through strategic acquisitions in our current markets and in new geographic markets. We acquired Marin Solar in November 2007 and Carlson Solar in January 2008. We cannot accurately predict the timing, size and success of our acquisition efforts. Our acquisition strategy involves significant risks,control, including the following:
| | · | Øthe availability of solar financing solutions; | | | · | the price at which competitors offer comparable products; | | · | marketing efforts undertaken by our abilitycompetitors; | | · | the extent of our competitors’ responsiveness to identify suitable acquisition candidates at acceptable prices,customer needs; and | | · | access to materials, labor and installation services. |
| Ø | | our ability to complete successfully the acquisitions of candidates that we identify,
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| Ø | | our ability to compete effectively for available acquisition opportunities,
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| Ø | | increasesCompetition in asking prices by acquisition candidates to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria,
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| Ø | | diversion of management’s attention to expansion efforts,
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| Ø | | unanticipated costs and contingent liabilities associated with acquisitions,
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| Ø | | failure of acquired businesses to achieve expected results,
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| Ø | | our failure to retain key customers or personnel of acquired businesses and
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| Ø | | difficulties entering markets in which we have no or limited experience.
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These risks, as well as other circumstances that often accompany expansion through acquisitions, could inhibit our growth and negatively impact our operating results. In addition, the size, timing and success of anysolar energy system installation market may increase in the future acquisitions may cause substantial fluctuations in our operating results from quarter to quarter. Consequently, our operating results for any quarter may not be indicative of the results that may be achieved for any subsequent quarter or for a full fiscal year. These fluctuations could adversely affect the market price of our Class A common stock.
Our failure to integrate the operations of acquired businesses successfully into our operations or to manage our anticipated growth effectively could materially and adversely affect our business and operating results.
In order to pursue a successful acquisition strategy, we must integrate the operations of acquired businesses into our operations, including centralizing certain functions to achieve cost savings and pursuing programs and processes that leverage our revenue and growth opportunities. The integration of the management, operations, and facilities of acquired businesses with our own could involve difficulties, which could adversely affect our growth rate and operating results. We may be unable to complete effectively the integration of the management, operations, facilities and accounting and information systems of acquired businesses with our own; to manage efficiently the combined operations of the acquired businesses with our operations; to achieve our operating, growth and performance goals for acquired businesses; to achieve additional
Risk factors
revenue as a result of our expanded operations; orlow barriers to achieve operating efficiencies or otherwise realize cost savings as aentry. Increased industry competition could result of anticipated acquisition synergies.in reductions in price, margins, and market share and in greater competition for qualified personnel. Our rate of growthbusiness and operating performance may sufferresults would be adversely affected if we failare unable to manage acquired businesses profitably without substantial additional costs or operational problems or to implement effectively combined growth and operating strategies.compete effectively.
We may require significant additional funds,derive the amountmajority of which will depend uponthe revenue from the sale of solar energy systems in east coast states. We currently derive the vast majority of our working capital and general corporate needs andSolar Division revenue from the size, timing and structuresale of future acquisitions. Our operations may not generate sufficient cash to enablesolar energy systems in east coast states. This geographic concentration exposes us to operate or expand our business. Any borrowings made to finance future acquisitions or for operations could make us more vulnerable to a downturn in our operating results, a downturn inincreased risks associated with the growth rates, government regulations, economic conditions, or increases in interest rates on future borrowings. If our cash flow from operations is insufficientweather and other factors that may be specific to meet our debt service requirements, we could be required to sell additional equity securities, refinance our obligations or dispose of assets in order to meet our debt service requirements. Adequate financing may not be available if and when we need it or may not be available on terms acceptable to us. In addition, our operations may not generate sufficient cash for our acquisition plans. The extentthose states to which we would be able or willingless subject if we were more geographically diversified.
Our Board of Directors has concluded that we will exit our mainland residential business and we may not generate the cost savings we expect. On March 27, 2019, our Board of Directors determined to exit our mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow. This realignment is expected to result in the reduction of workforce payroll plus burden of approximately $4.0 million annually. Revenues and net loss in 2018 for the mainland residential solar business were approximately $8.9 million and $6.3 million, respectively. In order for us to convert our existing backlog to revenue, we plan to use authorized integrators to complete installations throughout the remainder of 2019. These projected cost savings may not be attained, and we may not be successful at converting our equityexisting backlog into revenue utilizing authorized integrators. Our Solar Division installs solar energy systems, and many factors can prevent us from completing installations on time or on budget.
Factors that may prevent us from completing installations on time or on budget include: | · | shortages of materials; | | · | shortages of skilled labor; | | · | unforeseen installation scheduling, engineering, excavation, environmental or geological problems; | | · | job site issues that were not apparent during site inspection; | | · | natural disasters, hurricanes, weather interference, fires, earthquakes or other casualty losses or delays; | | · | delays in obtaining or inability to obtain or maintain necessary licenses or permits; | | · | changes to plans or specifications; | | · | performance by subcontractors; | | · | disputes with subcontractors; and | | · | unanticipated cost increases in materials, labor or other elements of our projects beyond budgets and allowances for contingencies. |
Our installation projects expose us to consummate future acquisitions willrisks of cost overruns due to typical uncertainties associated with any project or changes in the designs, plans or concepts of such projects. For these and other reasons, installation costs may exceed the estimated cost of completions. Availability and cost of financing for solar energy systems could reduce demand for our services and products. Many of our Solar Division customers, and prospective customers of our POWERHOUSE™ roofers and homebuilders, depend on loan financing to fund the marketpurchase price of our equity from time to time and the willingness of potential sellers to accept our equity as full or partial payment. Using our equitysolar energy systems. The interest rate for this purposefinancing varies with market conditions. Third-party financing sources may also charge significant fees for their financing products. If financing sources increase their fees or interest rates, the cost of purchasing our solar energy systems will increase and we may resultexperience decreased demand for our products and services, resulting in significant dilutionreduced revenue. In the alternative, if we elect to absorb any financing price increase by lowering the price of our products and services to keep the total cost to our shareholders. Tocustomers constant, our revenue will decrease, and we will experience lower profit margins. However, we continue to rely on third parties to finance most of our sales of solar energy systems in our Solar Division and we expect that prospective customers of our POWERHOUSE™ roofers similarly will rely on third parties to finance their purchases. An increase in interest rates or tight credit markets could make it difficult for customers to finance the extentcost of solar energy systems and could reduce demand for our services and products. Some of our prospective customers may depend on debt financing, such as home equity loans or leasing, to fund the purchase of a solar energy system. Third-party financing sources, specifically for solar energy systems, are currently limited. The lack of financing sources, limitations on available credit, or an increase in interest rates could make it difficult or too costly for our potential customers to secure the financing necessary to purchase a solar energy system on favorable terms, or at all, thus lowering demand for our services and products and negatively impacting our business. We may incur fines and other penalties if we do not conduct our business in accordance with licenses required for our operations and if any such license is suspended or lost, we may be unable to sell or install solar energy systems in the jurisdiction in question and our sales and revenue from that jurisdiction would be adversely affected.
As a construction company, we are unablerequired to usehold general or specialty contractors’ licenses in some of the jurisdictions in which we operate, although in other jurisdictions we are permitted to utilize the licenses of subcontractors. Some jurisdictions also require licenses to sell home improvement products or services, or to issue consumer credit. If we violate the rules of these licensing authorities, we may incur fines or other penalties or have our equitylicenses suspended or cancelled. Some licenses require us to make future acquisitions,employ personnel with specific qualifications. If we lose those personnel, we may lose our ability to grow through acquisitionsconduct business in that jurisdiction until we can hire a qualified replacement. We may be subject to unexpected warranty expenses or service claims that could reduce our profits. Our currently standard manufacturing warranty for our POWERHOUSE™ 3.0 solar shingles comes with an 11-year product warranty, which is the standard product warranty of most traditional solar panels today, and a 24-year power production warranty. Our Solar Division provides warranties for workmanship and, in certain cases, in energy production and, accordingly we bear the risk of warranty claims long after we have completed the installation of a solar energy system. Our current standard warranty for our installation services includes a warranty period of up to 10 years for defective workmanship. In addition, most manufacturers of solar photovoltaic modules offer a 25-year warranty period for declines in power performance. Although we maintain an estimated liability for potential warranty or service claims, claims in excess of our recorded liability could adversely affect our operating results. Our failure to predict accurately future warranty claims could result in unexpected volatility in our financial results.
We rely heavily on a limited bynumber of suppliers, installers and other vendors, and if these companies were unable to deliver critical components and services, it would adversely affect our ability to operate and our financial results. We rely on a limited number of third-party suppliers to provide the extentcomponents used in our POWERHOUSE™ in-roof solar shingles and our solar energy systems. We also rely on key vendors to provide internal and external services which are critical to our operations, including installation of solar energy systems, accounting and customer relationship management software, facilities and communications. The failure of our suppliers and vendors to supply us with products and services in a timely manner or on commercially reasonable terms could result in lost orders, delay our project schedules, limit our ability to operate and harm our financial results. If any of our suppliers or vendors were to fail to supply our needs on a timely basis or to cease providing us key components or services we use, we would be required to secure alternative sources of supply. We may have difficulty securing alternative sources of supply. If this were to occur, our business would be harmed. The installation and ongoing operation of solar energy systems involves significant safety risks. Solar energy systems generate electricity, which is inherently dangerous. Installation of these systems also involves the risk of falling from rooftops, personal injuries occurring at the job site and other risks typical of construction projects. Although we take many steps to assure the safe installation and operation of our solar energy systems, and maintain insurance against such liabilities, we may nevertheless be exposed to significant losses arising from personal injuries or property damage arising from our projects. Our failure to meet customer expectations in the performance of our services, and the risks and liabilities associated with placing our employees and technicians in our customers’ homes and businesses, could give rise to claims against us. Our failure or inability to meet customer expectations in the performance of our services could damage our reputation or result in claims against us. In addition, we are subject to various risks and liabilities associated with our employees and technicians providing installation services in the homes and businesses of our customers, including possible claims of errors and omissions, harassment, theft of customer property, criminal activity and other claims.
Product liability claims against us could result in adverse publicity and potentially significant monetary damages. As a seller of consumer products, we may face product liability claims in the event that use of our solar energy systems results in injuries. Because solar energy systems produce electricity, it is possible that our products could result in injury, whether by product malfunctions, defects, improper installation or other causes. If such injuries or claims of injuries were to occur, we could incur monetary damages and our business could be adversely affected by any resulting negative publicity. The successful assertion of product liability claims against us also could result in potentially significant monetary damages and, if our insurance protection is inadequate to cover these claims, could require us to make significant payments from our own resources. 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 raise capital for this purpose through debt or equity financings. The failureeffectively replace members of management who have left the company. Our continued success and our ability to obtain sufficient financing on favorable termsmaintain our competitive position is largely dependent upon, among other things, the efforts and conditions could have a material adverse effectskills of our senior executives and management team. We cannot guarantee that these individuals will remain with us. Further, we do not carry key man life insurance on our executives. If we lose the services of any members of our management team or other key personnel, our business financial condition, operating resultsmay be significantly impaired. In addition, we cannot assure you that we will be able to attract additional qualified senior executive, management and growth prospects.key personnel.
The loss of personnel or failure to hire additional personnel could materially and adversely affect our business, operating results and our ability to expand. The expansion of our business could place a significantsignificantly strain on our managerial, financial and personnel resources, particularly given our current reliance on our Chairman, Jirka Rysavy, who also is the Chairman and Chief Executive Officer of Gaiam.resources. To reach our goals, we must successfully recruit, train, motivate and retain additional employees, including management and technical personnel, integrate new employees into our overall operations and enhance our financial and accounting systems, controls and reporting systems. While we believe we have personnel sufficient for the current requirements of our business, expansion of our business could require us to employ additional personnel. The loss of personnel or our failure to hire additional personnel could materially and adversely affect our business, operating results and our ability to expand.
Our success dependsFrom time to time, we are subject to litigation which, if adversely determined, could cause us to incur substantial losses.
From time to time during the normal course of operating our businesses, we are subject to various litigation claims and legal disputes. As a result, we might also be required to incur significant legal fees, which may have a material adverse effect on our financial position. In addition, because we cannot accurately predict the valueoutcome of any action, it is possible that, as a result of current and/or future litigation, we will be subject to adverse judgments or settlements that could significantly reduce our Real Goods brand.earnings or result in losses. We depend on the name recognition of
Increased information technology security threats and more sophisticated computer crime pose a risk to our Real Goods brand in our marketing efforts. Maintainingsystems, networks, products and building recognition of our brand are important to expanding our customer base. If the value of our brand were adversely affected, our ability to attract customers would be negatively impacted and our growth could be impaired.services. We depend upon a limited number of suppliers for the components used in our solar energy systems.
We rely on technology, computer systems, third-party service providers, and our website for obtaining and storing certain information. Our business requires us to receive, retain and transmit personally identifiable information and other information about our customers, suppliers for components usedand employees, some of which is entrusted to third-party service providers and other businesses we interact with. Information technology security threats are increasing in frequency and sophistication. Our security measures have been breached in an immaterial manner in the past and may be breached in the future due to a cyber-attack, computer malware or viruses, employee error, malfeasance, fraudulent inducement (including so-called “social engineering” attacks and “phishing” scams) or other acts. Costs associated with our solar energy systems. Sharp, SunPowerpast security breach have not been significant. Unauthorized parties have previously obtained and Kyocera Solar currently account for over 90%may in the future obtain access to our data or the data of our purchasescustomers, suppliers or employees or may otherwise cause damage or interfere with our technology, computer systems or website. We develop and update processes and maintain systems in an effort to try to prevent this from occurring and seek assurances from businesses we interact with that they will do the same, but the development and maintenance of solar PV modules;these processes and Xantrex, Fronius, PVPoweredsystems are costly and SMA currently account for over 90%require ongoing monitoring and updating as technologies change, privacy and information security regulations change, and efforts to overcome security measures become more sophisticated. We have taken, and continue to undertake significant steps to protect such information and seek assurances from businesses we interact with that they will do the same, but there can be no assurance that our data security systems or those of our purchases of inverters. The failure of our suppliers to supply usbusinesses we interact with components in a timely manner or on commercially reasonable termswill not be compromised, and such compromise could result in lost orders, delaysuch information being obtained by unauthorized persons, adverse operational effects or interruptions, substantial additional costs or being subject to legal or regulatory proceedings, any of which could damage our project schedulesreputation in the marketplace or materially and harmadversely affect our business, financial condition, operating results and business expansion efforts. Our orders with certain of our suppliers may represent a very small portion of their Risk factorscash flows.
total business. As a result, these suppliersWhile we are exploring and evaluating strategic alternatives, we may not give prioritybe successful in identifying or completing any strategic alternative and any such strategic alternative may not yield additional value for shareholders.
On March 7, 2019, we announced that we had commenced a review of strategic alternatives which could result in, among other things, the possible sale of the Company. Our exploration of strategic alternatives may not result in the identification or consummation of any transaction. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business leading to potential delays in or cancellation of our orders. If any of our suppliers were to fail to supply our needs on a timely basis or to cease providing us key components we use, we would be required to secure alternative sources of supply. We may have difficulty securing alternative sources of supply in a timely manneroperations, and on commercially reasonable terms. If this were to occur, our business would be harmed. Shortages in the supply of silicon could adversely affect the availability and cost of the solar PV modules used in our solar energy systems.
Shortages of silicon could adversely affect the availability and cost of the solar PV modules we use in our solar energy systems. Manufacturers of solar PV modules depend upon the availability and pricing of silicon, one of the primary materials used in the manufacture of solar PV modules. The worldwide market for silicon from time to time experiences a shortage of supply, primarily because of demand for silicon by the semiconductor industry. Shortages of silicon cause the prices for solar PV modules to increase and supplies to become difficult to obtain. While we have been able to obtain sufficient supplies of solar PV modules to satisfy our needs to date, this may not be the case in the future. Future increases in the price of silicon could result in an increase in costs to us, price increases to our customers or reduced margins.
Because the solar energy system installation market is highly competitive and has low barriers to entry, we may face the loss of market share or reduced margins.
The solar energy system installation market is highly competitive and fragmented with low barriers to entry. We currently compete with a large number of relatively small installers and integrators, some of which do not have extensive industry experience and may lack adequate systems and capital. As the solar energy industry expands and industry consolidation occurs, we are more likely to encounter competition from larger companies, some of which may have greater financial, technical and marketing resources and greater name recognition than we do.
We believe that our ability to compete depends in part on a number of factors outside of our control, including the following:
| Ø | | the ownership by competitors of proprietary tools to customize solar energy systems to the needs of particular customers,
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| Ø | | the price at which competitors offer comparable products,
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| Ø | | the extent of our competitors’ responsiveness to customer needs and
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| Ø | | integrator technologies.
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Competition in the solar energy system installation market may increase in the future as a result of low barriers to entry. Increased industry competition could result in reductions in price, margins, and market share and in greater competition for qualified personnel. Our business and operating results would be adversely affected if we are unable to compete effectively.
Our failure to meet customer expectations ineffectively manage the performanceprocess, our business, financial condition and results of our services, and the risks and liabilities associated with placing our employees and technicians in our customers’ homes and businesses could give rise to claims against us.
Our failure or inability to meet customer expectations in the performance of our services could damage our reputation or result in claims against us. In addition, we are subject to various risks and liabilities associated with our employees and technicians providing installation services in the homes and businesses of our customers, including possible claims of errors and omissions, harassment, theft of customer property, criminal activity and other claims.
Risk factors
Product liability claims against us could result in adverse publicity and potentially significant monetary damages.
As a seller of consumer products, we face an inherent risk of exposure to product liability claims in the event that our solar energy systems’ use results in injuries. Since solar energy systems are electricity producing devices, it is possible that our products could result in injury, whether by product malfunctions, defects, improper installation or other causes. If such injuries or claims of injuries were to occur, we could incur monetary damages and our businessoperations could be adversely affected by any resulting negative publicity. The successful assertion of product liability claims against us also could result in potentially significant monetary damagesaffected. Any potential transaction and if our insurance protection is inadequate to cover these claims, could require us to make significant payments from our own resources.
We maythe related valuation would be subject to unexpected warranty expenses or service claims that could reduce our profits.
As a result of the length of the warranty periods we provide, we bear the risk of warranty claims long after we have completed the installation of a solar energy system. Our current standard warranty for our installation services includes a 10-year warranty period for defects in material and workmanship in California and a five-year warranty period for defects in material and workmanship in Colorado. In addition, most manufacturers of solar PV modules offer a 25-year warranty period for declines in power performance. Although we maintain a warranty reserve for potential warranty or service claims and we have not had material warranty claims in the past, claims in excess of our reserve could adversely affect our operating results. Our failure to predict accurately future warranty claims could result in unexpected volatility in our financial condition.
We relydependent upon our catalog and Internet sales channels for potential customers, and interruptions or failures associated with these sales channels could adversely impact our overall business.
We rely upon our Real Goods catalog and Internet channels to increase the awareness of the Real Goods brand and generate potential solar energy system purchaser leads. We believe these cross-marketing channels provide us with an advantage over our competitors because customers that purchase products through these channels may become potential buyers of solar energy systems. As a result, interruptions or failures associated with these channels could have an adverse impact on our business that goes beyond their normal contribution to our revenue.
We rely on communications and shipping networks to deliver our products.
Given our emphasis on customer service, the efficient and uninterrupted operation of order-processing and fulfillment functions is critical to our catalog and Internet business. To maintain a high level of customer service, we rely on a number of third-party service providers, such as delivery companies, telecommunications companiesfactors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and printers. Any interruption in services from our principal third-party service providers, including delays or disruptions resulting from labor disputes, power outages, human error, adverse weather conditions or natural disasters, could materially and adversely affect our business. In addition, products that we source overseas must be shipped to our distribution center by freight carriers, and a work stoppage or political unrest could adversely affect our ability to fulfill our customer orders.
An increase in interest rates could make it difficult for customers to finance the cost of solar energy systems and could reduce demand for our services and products.
Some of our prospective customers may depend on debt financing, such as home equity loans, to fund the initial capital expenditure required to purchase a solar energy system. Third-party financing sources specifically for solar energy systems are currently limited. The lackavailability of financing sources or an increase in interest rates could make it difficult or more costly for ourto potential customers to secure the financing necessary to purchase a solar energy systembuyers on favorable terms, or at all, thus lowering demand for our services and products and negatively impacting our business.
Risk factorsreasonable terms.
Risk Factors Related to our Relationship with GaiamOur Securities Our historical financial information as a business conducted by Gaiam may not be representative of our results as an independent public company.
The historical financial information included in this prospectus does not necessarily reflect what our financial position, operating results or cash flows would have been had we been an independent entity during the historical periods presented. The historical costs and expenses reflected in our consolidated financial statements include an allocation for certain corporate functions historically provided by Gaiam, including costs of fulfillment, customer service, finance and other administrative services, and income taxes. These expense allocations were based on what we and Gaiam considered to be reasonable reflections of the utilization of services provided or the benefits received by us. The historical financial information in our audited and unaudited consolidated financial statements may not be indicative of what our results of operations, financial position, changes in equity and cash flows would have been had we been a separate stand-alone entity during the periods presented or will be in the future. We have not made adjustments to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our separation from Gaiam, including changes in our employee base, changes in our tax structure, potential increased costs associated with reduced economies of scale and increased costs associated with being a publicly traded, stand-alone company.
Our ability to operate our business effectively may suffer if we or Gaiam terminate our intercorporate services agreement, or if we are unable to establish on a cost-effective basis our own administrative and other support functions in order to operate as a stand-alone company after the expiration or termination of our intercorporate services agreement with Gaiam.
As a wholly owned subsidiary of Gaiam, we have relied on administrative and other resources of Gaiam to operate our business. In connection with this offering, we have entered into an intercorporate services agreement to retain the ability for specified periods to use certain Gaiam resources. After the expiration or termination of that agreement, we will need to create our own administrative and other support systems or contract with third parties to replace Gaiam’s services. In addition, we must also establish disclosure controls and procedures and internal controls over financial reporting as part of our becoming a separate public company. These services may not be provided at the same level as when we were a wholly owned subsidiary of Gaiam, and we may not be able to obtain the same benefits that we received prior to the separation. These services may not be sufficient to meet our needs, and after our agreement with Gaiam expires or is terminated, we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently have with Gaiam. Any failure or significant downtime in our own administrative systems or in Gaiam’s administrative systems during the transitional period could result in unexpected costs, impact our results or prevent us from paying our suppliers or employees and performing other administrative services on a timely basis.
The agreement we entered into with Gaiam may be amended by the parties. While we are controlled by Gaiam, we may not have the leverage to negotiate amendments to this agreement if required on terms as favorable to us as those we would negotiate with an unaffiliated third party.
Our inability to resolve any disputes that arise between us and Gaiam with respect to our past and ongoing relationships may result in a reduction of our revenue.
Disputes may arise between Gaiam and us in a number of areas relating to our past and ongoing relationships, including the following:
| Ø | | labor, tax, employee benefit, indemnification and other matters arising from our separation from Gaiam;
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| Ø | | employee retention and recruiting;
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Risk factors
| Ø | | business combinations involving us;
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| Ø | | pricing for shared and transitional services;
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| Ø | | sales or distributions by Gaiam of all or any portion of its ownership interest in us;
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| Ø | | the nature, quality and pricing of services Gaiam has agreed to provide us; and
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| Ø | | business opportunities that may be attractive to both Gaiam and us.
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We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.
Some of our directors and executive officers may have conflicts of interest because of their ownership of Gaiam common stock, options to acquire Gaiam common stock and positions with Gaiam.
Some of our directors and executive officers own Gaiam common stock and options to purchase Gaiam common stock. In addition, some of our directors are also directors of Gaiam. Ownership of Gaiam common stock and options to purchase Gaiam common stock by our directors and officers after this offering and the presence of directors of Gaiam on our board of directors could create, or appear to create, conflicts of interest with respect to matters involving both us and Gaiam. For example, corporate opportunities may arise that are applicable to both of our businesses, such as the potential acquisition of a particular business or technology that is complementary to both of our businesses. However, Gaiam does not intend to acquire solar energy businesses. We have not established at this time any procedural mechanisms to address actual or perceived conflicts of interest of these directors and officers and expect that our board of directors, in the exercise of its fiduciary duties, will determine how to address any actual or perceived conflicts of interest on a case-by-case basis. If any corporate opportunity arises and if our directors and officers do not pursue it on our behalf, we may not become aware of, and may potentially lose, a significant business opportunity.
Risk Factors Related to this Offering
Gaiam controls us, and its interests may conflict with or differ from your interests as a shareholder.
Gaiam holds 100% of the 10,000,000 outstanding shares of our Class B common stock. The holders of our Class A common stock and our Class B common stock have substantially similar rights, preferences, and privileges except with respect to voting and conversion rights and other protective provisions as set forth in this prospectus. Each share of Class B common stock has ten votes per share, and each share of Class A common stock has one vote per share. Each share of Class B common stock is convertible at any time into one share of Class A common stock. In addition, if Gaiam transfers shares of our Class B common stock, it must elect whether or not to transfer the shares as Class B common stock or convert those shares into Class A common stock. The Class A common stock has no conversion rights. Immediately after completion of this offering, Gaiam will beneficially own approximately % of our outstanding shares of common stock, assuming Gaiam’s Class B common stock were converted into Class A common stock. In addition, immediately following this offering and assuming no conversion of any shares of Class B common stock, Gaiam will have approximately % of the total voting power of our common stock voting as a single class. Consequently, Gaiam will be able to exert substantial influence over our company and control matters requiring approval by our shareholders, including the election of directors, increasing our authorized capital stock, financing activities, a merger or sale of our assets and the number of shares available for issuance under our Incentive Plan. Our articles of incorporation provide that our board of directors may authorize the issuance of preferred stock, subject only to the approval of holders of our Class B common stock. As a result of Gaiam’s control, no change of control of our company can occur without Gaiam’s consent. Our Chairman, Jirka Rysavy, who is also the Chairman and Chief Executive Officer of Gaiam, currently owns approximately 26% of the outstanding equity, and in excess of 50% of the voting power, of Gaiam.
Risk factors
Gaiam’s and Mr. Rysavy’s voting control may discourage transactions involving a change of control of our company, including transactions in which you as a holder of our Class A common stock might otherwise receive a premium for your shares over the then current market price. Gaiam is not prohibited from selling a controlling interest in our company to a third party and may do so without your approval and without providing for a purchase of your shares of Class A common stock. Accordingly, your shares of Class A common stock may be worth less than they would be if Gaiam did not maintain voting control over us.
Because there is no existing market for our Class A common stock, our initial public offering price may not be indicative of the market price of our Class A common stock after this offering, which may decrease significantly.
Prior to this offering, there has not been a public market for our Class A common stock, and an active trading market may not develop or be sustained after this offering. The initial public offering price for the Class A common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq Global Market or otherwise or how liquid that market might become. The lack of an active market may reduce the value of your shares and impair your ability to sell your shares at the time or price at which you wish to sell them. An inactive market may also impair our ability to raise capital by selling additional shares of our Class A common stock and may impair our ability to acquire or invest in other companies, products or technologies by using our Class A common stock as consideration.
The market price of our Class A common stock may beCommon Stock has been volatile, whichand future volatility could result in substantial losses for investors. The market price of our Class A common stock is likely to beCommon Stock has been volatile in the past and could fluctuate widely in response to various factors, many of which are beyond our control, including the following: | Ø· | | actual or anticipated changes in our operating results; |
| Ø· | | regulatory, legislative or other developments affecting us or the solar energy industry generally; |
| Ø· | | changes in expectations relating to our services and products, plans and strategic position or those of our competitors or customers; |
| Ø· | | market conditions and trends within the solar energy industry; |
| Ø· | | acquisitions or strategic alliances by us or by our competitors; |
| Ø· | | litigation involving us, our industry or both; |
| Ø· | | introductions of new technological innovations, new services, or products or new pricing policies by us or by our competitors; |
| Ø· | | the gain or loss of significant customers;
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| Ø | | recruitment or departure of key personnel; |
| Ø· | | our ability to execute our business plan; |
| Ø· | | volume and timing of customer orders; |
Risk factors
| Ø· | | price and volume fluctuations in the overall stock market from time to time; |
| Ø· | | changes in investor perception; |
| Ø· | | the level and quality of any research analyst coverage of our Class A common stock; Common Stock; |
| Ø· | | changes in earnings estimates or investment recommendations by analysts; |
| Ø· | | the financial guidance we may provide to the public, any changes in such guidance or ourits failure to meet such guidance; |
| Ø· | | the trading volume of our Class A common stock or the sale of such stock by Gaiam, our management team or directors; Common Stock; |
| · | short-term investment in our Common Stock by investors; |
| · | our issuance of additional Common Stock or securities convertible into or exercisable for Common Stock; and |
| · | economic and other external factors; andfactors that impact purchasing decisions of our potential customers. |
| Ø | | general global economic and political instability.
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In addition,Future volatility of the stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies and industries. These fluctuations may include a so-called “bubble market” in which investors temporarily raise the price of the stocksour Common Stock could result in substantial losses for investors.
Future issuances of companies in certain industries, such as the renewable energy industry, to unsustainable levels. These market fluctuationsstock, options, warrants or other securities will cause substantial dilution and may significantlynegatively affect the market price of our Class A common stock.Common Stock. If you purchase
Ownership of our Class A commonsecurities may be diluted by future issuances of securities or the conversion or exercise of outstanding or to be issued options, warrants, convertible notes, convertible stock in this offering, you will incur immediate and substantial dilutionor other securities.
As of April 29, 2019, there were an aggregate of approximately 29 million shares of our Common Stock issuable upon exercise of outstanding warrants. The exercise price under certain of our outstanding warrants is subject to adjustment in the book value of your shares.future. The initial public offering price of our Class A common stock is substantially higher than the net pro forma tangible book value per share of our Class A common stock. Investors purchasing Class A common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing Class A common stock in this offering will incur immediate dilution of $ per share, based on the initial public offering price of $ per share, which is the midpoint of the offering range indicated on the cover of this prospectus. If the holders of outstanding
Derivative securities, such as convertible debt, options and warrants, exercise those options and warrants, you will suffer further dilution. Possiblecurrently outstanding or issued in the future sales of shares by Gaiammay contain anti-dilution protection provisions, which, if triggered, could adversely affect the market price of our Class A common stock, even if our business is doing well.
Immediately after completion of this offering, we will have outstanding shares of Class A common stock and 10,000,000 shares of Class B common stock. Subject to the restrictions described under “Shares Eligible for Future Sale” and applicable law, Gaiam could sell any or all of the shares of common stock owned by it from time to time for any reason. Under a registration rights agreement between us and Gaiam, Gaiam has the right to require us to registerissue a larger number of the shares of Class A common stock acquired upon conversion of its shares of Class B common stock to facilitatesecurity underlying such derivative security than the possible sale of such shares. Although weface amount.
We cannot predict the effect, if any, that future sales or issuance of shares of Class A common stock by Gaiam wouldour Common Stock into the market, or the availability of shares of our Common Stock for future sale, will have on the market price prevailing from time to time, salesof our Common Stock. Sales of substantial amounts of Class Aour Common Stock (including shares issued upon exercise of options and warrants or conversion of convertible related party debt), or the perception that such sales could occur, may materially affect prevailing market prices for our Common Stock.
Our common stock could become subject to the Securities and Exchange Commission’s “penny stock” regulations, which may limit the liquidity of Common Stock held by our shareholders.
The SEC has adopted regulations which generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. Based on our Common Stock’s trading price below $5.00 per share, if we are unable in the future to continue to satisfy an available exemption from the definition of “penny stock”, then our Common Stock would be considered a penny stock for purposes of federal securities laws. Penny stock is subject to regulations, which affect the ability of broker-dealers to sell such securities. Broker-dealers who recommend a penny stock to persons (other than established customers and accredited investors) must make a special written suitability determination and receive the purchaser’s written agreement to a transaction prior to sale. If penny stock regulations apply to our Common Stock, it may be difficult to trade the stock because compliance with the regulations can delay and/or preclude certain trading transactions. Broker-dealers could be discouraged from effecting transactions in our Common Stock if penny stock regulations apply because of the availability of such shares for salesales practice and disclosure requirements. This could adversely affect prevailing market prices.the liquidity or price of our Common Stock and impede the sale of the Common Stock in the secondary market. Risk factors
We do not expect to pay any cash dividends on our Class A common stockCommon Stock for the foreseeable future. We do not anticipate paying any cash dividends on our Class A common stockCommon Stock for the foreseeable future. Accordingly, you may have
Our business is subject to sell some or allreporting requirements that continue to evolve and change, which could continue to require significant compliance effort and resources. Because our Common Stock is publicly traded, we are subject to certain rules and regulations of your Class A common stock in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell our Class A common stockfederal, state and may lose some or allfinancial market exchange entities charged with the protection of investors and the amountoversight of your investment. Any determination to pay dividends incompanies whose securities are publicly traded. These entities, including the future on our Class A common stock will be made atPublic Company Accounting Oversight Board and the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, capitalSEC, periodically issue new requirements and other factors that our board of directors deems relevant. We will incur increased costsregulations and legislative bodies also review and revise applicable laws such as a result of being a public company.
As a public company, we will incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act as well as rules implemented byof 2002 and the SecuritiesDodd-Frank Wall Street Reform and Exchange Commission, or the SEC, require us to adopt corporate governance practices applicable to public companies. We also expect to incur additional compliance costs as a resultConsumer Protection Act of our Class A common stock being included for quotation on the Nasdaq Global Market. We expect2010. As interpretation and implementation of these newlaws and rules and promulgation of new regulations to increase our legal and financial compliance costs and to make some activities more time consuming and costly. Wecontinues, we will incur additional costs associated with our public company reporting requirements. We also expect these new rules and regulationscontinue to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limitscommit significant financial and coverage ormanagerial resources and incur substantially higher costs to obtain our desired coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.additional expenses.
Our compliance with the Sarbanes-Oxley Act and SEC rules concerning internal controls will be time consuming, difficult, and costly.
It will be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls, processes and reporting procedures personnel. If we are unable to comply with the requirements of the Sarbanes-Oxley Act, we may not be able to obtain the independent accountant certifications that the Sarbanes-Oxley Act requires publicly traded companies to obtain.
If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal control over financial reporting, or if we identify or fail to remedy any material weaknessesProvisions in our internal controls, such failures could result in material misstatementsarticles of incorporation and bylaws might discourage, delay or prevent a change of control of our company or change in our financial statements, cause investors to lose confidence in our reported financial information, limit our ability to raise capitalmanagement and, have a negative effect ontherefore, depress the trading price of our Class A common stock.Common Stock.
Under Section 404
Our articles of incorporation and bylaws contain provisions that could depress the trading price of our Common Stock by discouraging, delaying or preventing a change of control of our company or changes in our management that our shareholders may believe advantageous. These provisions include: | · | Our Board of Directors may consist of any number of directors, which may be fixed from time to time by our Board of Directors. Newly created directorships resulting from any increase in our authorized number of directors may be filled by the affirmative vote of a majority of the directors then in office or by an election at an annual meeting or special meeting of shareholders called for that purpose, and any vacancies on its Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled by the affirmative vote of a majority of the remaining Board of Directors, even if less than a quorum is remaining in office. |
| · | A shareholder must provide advance notice of any proposal to be brought before an annual meeting of shareholders by a shareholder, including any nomination for election of directors by any shareholder entitled to vote for the election of directors at the meeting. |
| · | No shareholder proposal may be considered at a meeting of our shareholders unless the proposal relates to a matter on which a shareholder vote is required by our articles of incorporation, bylaws or by applicable law. |
| · | Our Board of Directors has the power to issue preferred stock with designations, preferences, limitations and relative rights determined by our Board of Directors without any vote or action by shareholders. The issuance of preferred stock or of rights to purchase preferred stock could have the effect of making it more difficult for a third party to acquire our company, or of discouraging a third party from attempting to acquire our company. |
| · | Our Board of Directors may amend, supplement or repeal our bylaws or adopt new bylaws, subject to repeal or change by action of our shareholders. |
DESCRIPTION OF THE TRANSACTION Registered Offering (Shelf Warrants) April 2019 Offering (Series R Warrants and Series S Warrants) In connection with the April 2019 Offering, the Company issued the Series R Warrants and Series S Warrants, as described above. Private Placements (Private Warrants) July 2014 Offering (July 2014 Warrants) On July 9, 2014, the Company closed a private placement of units consisting of an aggregate of 244 shares of Common Stock and WP14 warrants to purchase an aggregate of up to 110 shares of Common Stock (the “July 2014 Warrants”) pursuant to the terms of the Sarbanes-Oxley Act andSecurities Purchase Agreement dated July 2, 2014. The current SEC regulations, beginning with our annual report on Form 10-K for our fiscal year ending December 31, 2009, we will be required to furnish a report by our management on our internal control over financial reporting. We will soon beginholders of the process of documenting and testing our internal control proceduresJuly 2014 Warrants are listed in order to satisfy these requirements, which is likely to resultthe selling shareholder table included in increased general and administrative expenses and may shift management time and attention from revenue-generating activities to compliance activities. While we expect to expend significant resources to complete this important project, we may not be able to achieve our objective on a timely basis.the section entitled “SELLING SHAREHOLDERS.” February 2015 Offering (February 2015 PA Warrants) Information regarding forward-looking statementsOn February 26 and February 27, 2015, the Company closed a registered offering of units (the “February 2015 Offering”). In connection with the February 2015 Offering, on February 27, 2015, in a private placement, the Company sold and issued to the placement agent, WestPark Capital, Inc. (“WestPark”), for an aggregate purchase price of $100, the WPA warrant to purchase 49 shares of Common Stock (the “February 2015 PA Warrants”) pursuant to the terms of the Placement Agent Agreement between the Company and WestPark. The current holders of the February 2015 PA Warrants are listed in the selling shareholder table included in the section entitled “SELLING SHAREHOLDERS.”
SomeJune 2015 Offering (June 2015 PA Warrants)
On June 30, and July 1, 2015, the Company closed a registered offering of units (the “June 2015 Offering”). In connection with the June 2015 Offering, on July 1, 2015, in a private placement, the Company sold and issued to the placement agent, WestPark, for an aggregate purchase price of $100, the WPA2 warrants to purchase 186 shares of Common Stock (the “June 2015 PA Warrants”) pursuant to the terms of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s DiscussionPlacement Agency Agreement between the Company and AnalysisWestPark. The current holders of Financial Conditionsuch warrants are listed in the selling shareholder table included in the section entitled “SELLING SHAREHOLDERS.”
April 2016 Offering (Series G Warrants and ResultsApril 2016 PA Warrants) On April 1, 2016, the Company closed a private placement of Operations,” “Business”$10.0 million Senior Secured Convertible Notes due on April 1, 2019 (the “2016 Notes”) and elsewhere in this prospectus may contain forward-looking statements, withinSeries G Warrants to purchase 8,300 shares of Common Stock (the “April 2016 Offering”). In connection with the meaningApril 2016 Offering, on April 1, 2016, the Company sold and issued to the placement agent, Roth Capital Partners, LLC (“Roth”), for an aggregate purchase price of $100, the WPA3 warrants to purchase 1,411 shares of Common Stock (the “April 2016 PA Warrants”) pursuant to the terms of the Privateengagement letter between the Company and Roth. The current holders of the Series G Warrants and April 2016 PA Warrants are listed in the selling shareholder table included in the section entitled “SELLING SHAREHOLDERS.” December 2016 Offering (December 2016 PA Warrants) On December 13, 2016, the Company closed a registered offering of units (the “December 2016 Offering”). In connection with the closing, the Company issued to the placement agent, Roth, the WPA5 warrants to purchase 30,834 shares of Common Stock (the “December 2016 PA Warrants”) pursuant to the terms of the Placement Agency Agreement between the Company and Roth. The current holders of the December 2016 PA Warrants are listed in the selling shareholder table included in the section entitled “SELLING SHAREHOLDERS.”
February 2017 Offerings (February 6, 2017 and February 9, 2017 PA Warrants) On February 6, 2017, the Company closed a registered offering of units. In connection with the closing, the Company issued to the placement agent, Roth, WPA6 warrants to purchase 185,000 shares of Common Stock (the “February 6, 2017 PA Warrants”), pursuant to the terms of the Placement Agency Agreement between the Company and the placement agent. The current holders of the February 6, 2017 PA Warrants are listed in the selling shareholder table included in the section entitled “SELLING SHAREHOLDERS.” On February 9, 2017, the Company closed a registered offering of units. In connection with the closing, the Company issued to the placement agent, Roth, WPA7 warrants to purchase 120,000 shares of Common Stock (the “February 9, 2017 PA Warrants”), pursuant to the terms of the Placement Agency Agreement between the Company and the placement agent. The current holders of the February 9, 2017 PA Warrants are listed in the selling shareholder table included in the section entitled “SELLING SHAREHOLDERS.”
January 2018 Offering (Series O Warrant and January 2018 PA Warrants) On January 4, 2018, the Company issued and sold a Series O Warrant to purchase 1,600,000 shares of Common Stock to one institutional and accredited investor pursuant to the terms of the Securities Litigation Reform Act of 1995, that reflect our current views with respect to, among other things, future events and financial performance. We generally identify forward-looking statements by terminology such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “could,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this prospectus are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. We caution you that no forward-looking statement is a guarantee of future performance, and you should not regard any forward-looking statement as a representation by us, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. You should not place undue reliance on these forward-looking statements which reflect our view onlyPurchase Agreement, dated as of January 2, 2018, between the dateCompany and the investor in a private placement in connection with a concurrent registered sales of this prospectus. While we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combinationshares of factsCommon Stock and factors currently known by us and our projectionsSeries P Warrants to the investor (collectively, the “January 2018 Offering”). The current holder of the future, about which we cannot be certain. Such forward-looking statements are subject to various known and unknown risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity, includingSeries O Warrant is listed in the risks outlinedselling shareholder table included in this prospectus. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those expressed or implied by these statements. These factors should not be construed as exhaustive and should be readthe section entitled “SELLING SHAREHOLDERS.” On January 4, 2018, in conjunctionconnection with the other cautionary statements thatJanuary 2018 Offering the Company sold and issued to the placement agent, WestPark, for an aggregate purchase price of $100, WPA8 warrants to purchase 128,000 shares of Common Stock (the “January 2018 PA Warrants”) pursuant to the terms of the engagement letter between the Company and WestPark. The current holders of the January 2018 PA Warrants are listed in the selling shareholder table included in this prospectus. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. We qualify all the forward-looking statements contained in this prospectus by the foregoing cautionary statements. The risk factors discussed in “Risk Factors” could also cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.
section entitled “SELLING SHAREHOLDERS.” UseApril 2018 Offering (Series Q Warrants and April 2018 PA Warrants)
On April 9, 2018, the Company issued and sold (the “April 2018 Offering”) convertible notes and warrants to two institutional and accredited investors: (i) $10.75 million in principal amount and $10 million funding amount (reflecting an original issue discount of proceeds We estimate that our$750,000) of convertible notes due April 9, 2019, consisting of (a) two Series A Senior Convertible Notes in the aggregate principal amount of $5,750,000 (the “Series A Notes”) in consideration for aggregate cash payments of $5,000,000, (b) two Series B Senior Secured Convertible Notes in the aggregate principal amount of $5,000,000 (the “Series B Notes,” and collectively with the Series A Notes, the “2018 Notes”) for consideration consisting of two secured promissory notes, each issued and payable by an investor, in the aggregate principal amount of $5,000,000, and (ii) Series Q Warrants to purchase up to 9,126,984 shares of the Company’s Common Stock under the terms of the Securities Purchase Agreement, dated March 30, 2018, as amended, among the Company and the investors. The Company received net proceeds from this offering,of approximately $4.4 million at the closing, after deducting underwriting discounts and commissions to the placement agent, WestPark, and estimated offering expenses payable by us, will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option, based uponCompany associated with the private placement. The current holders of the Series Q Warrants are listed in the selling shareholder table included in the section entitled “SELLING SHAREHOLDERS.”
On April 9, 2018, in connection with the April 2018 Offering, the Company sold and issued to the placement agent, WestPark, for an assumed initial public offeringaggregate purchase price of $ per share, which is$100, WPA9 warrants to purchase 730,159 shares of Common Stock (the “April 2018 PA Warrants”) pursuant to the midpointterms of the offering range indicated onengagement letter between the cover of this prospectus. We will use approximately $19.8 millionCompany and the placement agent. The current holders of the net proceedsApril 2018 PA Warrants are listed in the selling shareholder table included in the section entitled “SELLING SHAREHOLDERS.”
April 2019 Offering (April 2019 PA Warrants)
On April 2, 2019, in connection with the April 2019 Offering, the Company sold and issued to repay amounts owedthe placement agent, Dawson James Securities, Inc. (“Dawson James”), for an aggregate purchase price of $100, WPA10 warrants to Gaiam for costspurchase 1,389,474 shares of Common Stock (the “April 2019 PA Warrants”) pursuant to acquire and expand our business. We have no formal written loan agreement with Gaiam regarding our intercompany payable, and it has no maturity date. Gaiam historically did not charge us interest on this intercompany payable. We intend to use approximately $ millionthe terms of the net proceeds for working capitalengagement letter between the Company and general corporate purposes, which may include future acquisitionsDawson James. The current holders of businesses. We currently have no agreements or commitments to complete any such transaction andthe April 2019 PA Warrants are not involved in any negotiations to do so. The amounts and timing of our actual expenditures will depend upon numerous factors. A $1.00 increase (decrease)listed in the assumed initialselling shareholder table included in the section entitled “SELLING SHAREHOLDERS.”
Description of the Warrants
Subject to applicable laws, the Warrants may be offered for sale, sold, transferred or assigned without our consent. However, there is no established public offeringtrading market for the Warrants and Real Goods Solar does not expect one to develop. The below descriptions of the terms of the Warrants are qualified in their entirety by the forms of Warrants included as Exhibits 4.6, 4.10, 4.13, 4.15, 4.16, 4.23, 4.26, 4.29, 4.30, 4.32, 4.35, 4.37, 4.38, 4.39 and 4.40 to the registration statement of which this prospectus is a part. The table below indicates the current exercise price, of $ per share would increase (decrease) the net proceeds to us from this offering by $ million, assuming the number of shares offeredof Common Stock under, the issuance date and the expiration date of each Warrant as of April 29, 2019. | Warrant | | Current
Exercise
Price | | | Number
of Shares | | | Issuance Date | | Expiration Date | | July 2014 Warrants | | $ | 38,280 | | | | 84 | | | July 9, 2014 | | January 9, 2020 | | February 2015 PA Warrants | | $ | 6,000 | | | | 49 | | | February 27, 2015 | | February 22, 2020 | | June 2015 PA Warrants | | $ | 744 | | | | 186 | | | June 30, 2015 | | June 26, 2020 | | Series G Warrants | | $ | 1.36 | | | | 3,322 | | | April 1, 2016 | | October 1, 2021 | | April 2016 PA Warrants | | $ | 496.80 | | | | 1,411 | | | April 1, 2016 | | March 1, 2021 | | December 2016 PA Warrants | | $ | 10.50 | | | | 30,834 | | | December 13, 2016 | | December 8, 2021 | | February 6, 2017 PA Warrants | | $ | 3.88 | | | | 185,500 | | | February 6, 2017 | | February 1, 2022 | | February 9, 2017 PA Warrants | | $ | 3.13 | | | | 120,000 | | | February 9, 2017 | | February 7, 2022 | | Series O Warrant | | $ | 1.47 | | | | 1,600,000 | | | January 4, 2018 | | July 4, 2023 | | January 2018 PA Warrants | | $ | 1.47 | | | | 128,000 | | | January 4, 2018 | | July 4, 2023 | | Series Q Warrants | | $ | 0.19 | | | | 317,678 | | | April 9, 2018 | | April 9, 2023 | | April 2018 PA Warrants | | $ | 0.19 | | | | 730,160 | | | April 9, 2018 | | April 9, 2023 | | Series R Warrants | | $ | 0.20 | | | | 17,368,421 | | | April 2, 2019 | | April 2, 2024 | | Series S Warrants | | $ | 0.01 | | | | 693,767* | | | April 2, 2019 | | April 2, 2024 | | April 2019 PA Warrants | | $ | 0.25 | | | | 1,389,474 | | | April 2, 2019 | | April 2, 2024 |
* Represents the remaining shares of Common Stock issuable thereunder. Upon issuance, the Series S Warrants were exercisable for an aggregate of 1,430,141 shares of Common Stock, all of which are covered by us, asthe registration statement of which this prospectus is a part for purposes of Rule 415(a)(5) and (a)(6). Provisions for changes to or adjustments in the exercise price and other material terms of the Warrants are described below. Series R Warrants and Series S Warrants The exercise price of the Series R Warrants is subject to adjustments for stock splits or similar events, and if the Company in the future issue shares of Common Stock or securities exercisable for or convertible into shares of Common Stock at an effective price per share less than the exercise price then in effect, then the exercise price will be reduces to such lower effective price per share. In addition, the Company may, with the consent of the “required holders” (as defined in the Series R Warrants), reduce the then current exercise price to any amount and for any period of time deemed appropriate by the Company’s Board of Directors. Under certain circumstances, the holders of the Series R Warrants may elect to exercise them through a cashless exercise, in which case the holders will receive upon such exercise the “net number” of shares of Common Stock determined according to the formula set forth in the Series R Warrants and the Company will not receive the exercise price. Further, on or after the 60th day following issuance, if the volume weighted price of the Common Stock for five consecutive trading days is less than the exercise price, the holder may thereafter, in its sole discretion and regardless of whether the shares of Common Stock issuable upon exercise of a Series R Warrant is not covered by a registration statement under the Securities Act, elect to exercise a Series R Warrant without payment of any exercise price and receive a number of shares of Common Stock equal to the product of (x) the aggregate number of shares that would be issuable upon exercise of a Series R Warrant if such exercise were by means of a cash exercise rather than a cashless exercise and (y) 0.50. The holder may not exercise a Series R Warrant and the Company may not issue shares of Common Stock under a Series R Warrant if, after giving effect to the exercise or issuance, the holder together with its affiliates would beneficially own in excess of a set percentage of the outstanding shares of the Common Stock. The cap was initially set on the cover pagedate of issuance at a percentage not in excess of 9.99%, at each holder’s election. At each holder’s option, the cap may be increased or decreased to any other percentage not in excess of 9.99%, except that any increase will not be effective until the 61st day after notice to us. The holders of the Series R Warrants are entitled to acquire options, convertible securities or rights to purchase the Company’s securities or property granted, issued or sold pro rata to the holders of its Common Stock on an “as if exercised for Common Stock” basis. The holders of the Series R Warrants are entitled to receive any dividend or other distribution of the Company’s assets (or rights to acquire its assets), at any time after the issuance of the Series R Warrants, on an “as if exercised for Common Stock” basis. The Series R Warrants prohibit the Company from entering into transactions constituting a “fundamental transaction” (as defined in the Series R Warrants) unless the successor entity assumes all of the Company’s obligations under the Series R Warrants and the other transaction documents in a written agreement approved by the “required holders” of the Series R Warrants. Further, after a fundamental transaction, upon the request of a holder, the Company is required to purchase such holder’s Series R Warrants for an amount equal to the “Black Scholes value” (as defined in the Series R Warrants) of the remaining unexercised portion of such Series R Warrants. 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 terms of the Series S Warrants are substantially the same as the Series R Warrants, other than the exercise price is not subject to adjustment upon subsequent issuances of shares of Common Stock or securities exercisable for or convertible into shares of Common Stock, and holders may not require the Company to purchase the Series R Warrants for the “Black Scholes value.” July 2014 Warrants The exercise price and number of shares of Common Stock issuable under the July 2014 Warrants are subject to anti-dilutive adjustments upon the occurrence of certain events, such as stock splits. The July 2014 Warrants contain provisions concerning the assumption of the July 2014 Warrants in connection with a Fundamental Transaction (as defined in the July 2014 Warrants), and mandatory and voluntary redemption of the July 2014 Warrants under certain circumstances. If at any time after the July 2014 Warrants are exercisable there is no effective registration statement on file with the SEC registering, or no current prospectus available for, the resale of the shares of our Common Stock issuable upon exercise of the July 2014 Warrants, the July 2014 Warrants may be exercised by means of a “cashless exercise.” Under the terms of the July 2014 Warrants, no selling shareholder may exercise its July 2014 Warrants if, after giving effect to such exercise and the issuance of the shares of Common Stock issued pursuant thereto, such selling shareholder, together with any of its affiliates, would beneficially own a number of shares of our Common Stock which would exceed 4.99% of the issued and outstanding Common Stock. However, a selling shareholder may increase or decrease this percentage to any other percentage not in excess of 9.99% effective no earlier than the 61st day after delivering written notice to us. February 2015 PA Warrants
The exercise price of the February 2015 PA Warrants is subject to adjustments for stock splits and similar events. In addition, the Company may, with the consent of the “required holders” (as defined in the February 2015 PA Warrants), reduce the then current exercise price to any amount and for any period of time deemed appropriate by the Company’s Board of Directors. A holder of a February 2015 PA Warrant may elect to exercise it through a cashless exercise at any time, regardless of whether the shares of Common Stock issuable upon exercise of the February 2015 PA Warrants are covered by a registration statement under the Securities Act, in which case the holder will receive upon such exercise the “net number” of shares of Common Stock determined according to the formula set forth in the February 2015 PA Warrants and the Company will not receive the exercise price. A holder may not exercise a February 2015 PA Warrant and the Company may not issue shares of Common Stock under the February 2015 PA Warrant if, after giving effect to the exercise or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of Common Stock. At the holder’s option, the cap may be increased or decreased to any other percentage not in excess of 9.99%, except that any increase will not be effective until the 61st day after notice to the Company. The holders of the February 2015 PA Warrants are entitled to acquire options, convertible securities or rights to purchase the Company’s securities or property granted, issued or sold pro rata to the holders of its Common Stock on an “as if exercised for Common Stock” basis. The holders of the February 2015 PA Warrants are entitled to receive any non-cash dividend or other distribution of the Company’s assets (or rights to acquire its assets), at any time after the issuance of the February 2015 PA Warrants, on an “as if exercised for Common Stock” basis. The February 2015 PA Warrants prohibit the Company from entering into transactions constituting a “fundamental transaction” (as defined in the February 2015 PA Warrants) unless the successor entity assumes all of the Company’s obligations under the February 2015 PA Warrants in a written agreement approved by the “required holders” of the February 2015 PA Warrants. 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. Pursuant to FINRA rules, the February 2015 PA Warrants and the underlying securities are subject to certain restrictions on transfer. June 2015 PA Warrants
The exercise price of the June 2015 PA Warrants is subject to adjustments for stock splits and similar events. In addition, the Company may, with the consent of the “required holders” (as defined in the February 2015 PA Warrants), reduce the then current exercise price to any amount and for any period of time deemed appropriate by the Company’s Board of Directors. A holder of a June 2015 PA Warrant may elect to exercise it through a cashless exercise at any time, regardless of whether the shares of Common Stock issuable upon exercise of the June 2015 PA Warrant are covered by a registration statement under the Securities Act, in which case the holder will receive upon such exercise the “net number” of shares of Common Stock determined according to the formula set forth in the June 2015 PA Warrants and the Company will not receive the exercise price. A holder may not exercise a June 2015 PA Warrant and the Company may not issue shares of Common Stock under the June 2015 PA Warrant if, after giving effect to the exercise or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of Common Stock. At the holder’s option, the cap may be increased or decreased to any other percentage not in excess of 9.99%, except that any increase will not be effective until the 61st day after notice to the Company. The holders of the June 2015 PA Warrants are entitled to acquire options, convertible securities or rights to purchase the Company’s securities or property granted, issued or sold pro rata to the holders of its Common Stock on an “as if exercised for Common Stock” basis. The holders of the June 2015 PA Warrants are entitled to receive any non-cash dividend or other distribution of the Company’s assets (or rights to acquire its assets), at any time after the issuance of the June 2015 PA Warrants, on an “as if exercised for Common Stock” basis. The June 2015 PA Warrants prohibit the Company from entering into transactions constituting a “fundamental transaction” (as defined in the June 2015 PA Warrants) unless the successor entity assumes all of the Company’s obligations under the June 2015 PA Warrants in a written agreement approved by the “required holders” of the June 2015 PA Warrants. 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. Pursuant to FINRA rules, the February 2015 PA Warrants and the underlying securities are subject to certain restrictions on transfer.
Series G Warrants and April 2016 PA Warrants
The exercise price of the Series G Warrants is subject to adjustments for stock splits and similar events. Under certain circumstances, the holders of the Series G Warrants may elect to exercise them through a cashless exercise, in which case the holders will receive upon such exercise the “net number” of shares of Common Stock determined according to the formula set forth in the Series G Warrants and the Company will not receive the exercise price. A holder may not exercise any of the Series G Warrants, and the Company may not issue shares of Common Stock upon exercise of any of the Series G Warrants if, after giving effect to the exercise or issuance, the holder together with is “attribution parties,” would beneficially own in excess of 9.99% of the outstanding shares of Common Stock. At each holder’s option, the cap may be increased or decrease to any other percentage not in excess of 9.99%, except that any increase will not be effective until the 61st day after notice to the Company. The holders of the Series G Warrants are entitled to receive any dividend or other distribution of the Company’s assets (or rights to acquire its assets), at any time after the issuance of the Series G Warrants, on an “as if exercised for Common Stock” basis. The holders of the Series G Warrants are entitled to acquire options, convertible securities or rights to purchase the Company’s securities or property granted, issued or sold pro rata to the holders of its Common Stock on an “as if exercised for Common Stock” basis. The Series G Warrants prohibit the Company from entering into transactions constituting a “fundamental transaction” (as defined in the Series G Warrants) unless the successor entity assumes all of the Company’s obligations under the Series G Warrants and the other transaction documents in a written agreement approved by the “required holders” (as defined in the Series G Warrants) of the Series G Warrants. The definition of “fundamental transactions” includes, but is not limited to, mergers, a sale of all or substantially all our assets, certain tender offers and other transactions that result in a change of control.
The April 2016 PA Warrants have substantially the same terms as the Series G Warrants other than they (i) expire five years after the effective date of the private placement, and (ii) have cashless exercise rights regardless of whether an effective registration statement registering, or a current prospectus being available for, the resale of the shares of Common Stock underlying the April 2016 PA Warrants. December 2016 PA Warrants The exercise price of the December 2016 PA Warrant is subject to adjustments for stock splits and similar events. In addition, the Company may, with the consent of the “required holders” (as defined in the December 2016 PA Warrant), reduce the then current exercise price to any amount and for any period of time deemed appropriate by the Company’s Board of Directors. The holder of the December 2016 PA Warrant may elect to exercise it through a cashless exercise at any time, regardless of whether the shares of Common Stock issuable upon exercise of the December 2016 PA Warrant are covered by a registration statement under the Securities Act (as defined below), in which case the holder will receive upon such exercise the “net number” of shares of Common Stock determined according to the formula set forth in the December 2016 PA Warrant and the Company will not receive the exercise price. The holder may not exercise the December 2016 PA Warrant and the Company may not issue shares of Common Stock under the December 2016 PA Warrant if, after giving effect to the exercise or issuance, the holder together with its affiliates would beneficially own in excess of 4.99% of the outstanding shares of Common Stock. At the holder’s option, the cap may be increased or decreased to any other percentage not in excess of 9.99%, except that any increase will not be effective until the 61st day after notice to the Company. The holder of the December 2016 PA Warrant is entitled to acquire options, convertible securities or rights to purchase the Company’s securities or property granted, issued or sold pro rata to the holders of its Common Stock on an “as if exercised for Common Stock” basis. The holder of the December 2016 PA Warrant is entitled to receive any non-cash dividend or other distribution of the Company’s assets (or rights to acquire its assets), at any time after the issuance of the December 2016 PA Warrant, on an “as if exercised for Common Stock” basis. The December 2016 PA Warrant prohibits the Company from entering into transactions constituting a “fundamental transaction” (as defined in the December 2016 PA Warrant) unless the successor entity assumes all of the Company’s obligations under the December 2016 PA Warrant in a written agreement approved by the “required holders” of the December 2016 PA Warrant. 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. Pursuant to FINRA rules, the December 2016 PA Warrant and the underlying securities are subject to certain restrictions on transfer. February 2017 PA Warrants
The terms of the February 2017 PA Warrants are substantially the same as the December 2016 PA Warrant. Series O Warrant and January 2018 PA Warrants
The exercise price of the Series O Warrant is subject to adjustments for stock splits and similar events. Subject to applicable laws, the Series O Warrant may be offered for sale, sold, transferred or assigned without the Company’s consent. If the resale of the shares of Common Stock issuable upon exercise of the Series O Warrant is not registered on an effective registration statement, the holder of the Series O Warrant may elect to exercise the Series O Warrant through a cashless exercise. Upon a cashless exercise, a holder will receive the “net number” of shares of Common Stock determined according to the formula set forth in the Series O Warrant and the Company will not receive the cash exercise price. A holder may not exercise the Series O Warrant and the Company may not issue shares of Common Stock under the Series O Warrant if, after giving effect to the exercise or issuance, each holder together with its affiliates would beneficially own in excess of 9.95% of the outstanding shares of the Common Stock. At a holder’s option, the cap may be increased or decreased to any other percentage not in excess of 9.99%, except that any increase will not be effective until the 61st day after notice to the Company. The holder of the Series O Warrant is entitled to acquire options, convertible securities or rights to purchase the Company’s securities or property granted, issued or sold pro rata to the holders of its Common Stock on an “as if exercised for Common Stock” basis. The holder of the Series O Warrant is entitled to receive any dividend or other distribution of the Company’s assets (or rights to acquire its assets), at any time after the issuance of the Series O Warrant, on an “as if exercised for Common Stock” basis. The Series O Warrant prohibits the Company from entering into transactions constituting a “fundamental transaction” (as defined in the Series O Warrant) unless the successor entity assumes all of the Company’s obligations under the Series O Warrant and the other transaction documents in a written agreement approved by the “required holders” of the Series O Warrant. 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 terms of the January 2018 PA Warrants are substantially the same as the Series O Warrant other than that they (i) expire five years after the effective date of the offering; (b) are exercisable through a cashless exercise regardless of whether the shares of Common Stock issuable upon exercise of the January 2018 PA Warrant are covered by a registration statement under the Securities Act; and (iii) pursuant to FINRA rules, the January 2018 PA Warrants and the underlying securities are subject to certain restrictions on transfer. Series Q Warrant and April 2018 PA Warrant
Holders of Series Q Warrants are entitled to use cashless exercise if after six months from issuance, at any time, there is no registration statement covering the resale of the shares of Common Stock issuable upon exercise of the Series Q Warrants. The exercise price is subject to adjustments for stock splits, stock dividends, and similar events. In addition, the exercise price will be subject to reduction in the event of (i) a sale or deemed issuance or sale of shares of Common Stock or other securities convertible, exercisable or exchangeable for shares of Common Stock (other than Excluded Securities (as defined in the Series Q Warrants)) for consideration per share less than the exercise price of the Series Q Warrants will be reduced in accordance with formulas provided in the Series Q Warrants, (ii) a sale of Variable Price Securities (as defined in the Series Q Warrants), in which case the holder will have the right to substitute the exercise price for the Variable Price, (iii) if a stock split, stock dividend, stock combination recapitalization or other similar transaction involving the Common Stock and the Event Market Price (as defined in the Series Q Warrants) is less than the exercise price, in which case the exercise price shall be reduced to the Event Market Price, or (iv) at any time, with the prior written consent of the Required Holders (as defined in the Series Q Warrants), to reduce the exercise price. A holder may not exercise any of the Series Q Warrants, and we may not issue shares of Common Stock upon exercise of any of the Series Q Warrants if, after giving effect to the exercise, a holder together with its “attribution parties,” would beneficially own in excess of a set percentage not in excess of 9.99%, as elected by each investor at closing, of the outstanding shares of our Common Stock. At each holder’s option, the cap may be increased or decrease to any other percentage not in excess of 9.99%, except that any increase will not be effective until the 61st day after notice to us. The holders of the Series Q Warrants are entitled to receive any dividend or other distribution of our assets (or rights to acquire its assets) at any time after the issuance of the Series Q Warrants, on an “as if exercised for Common Stock” basis. The holders of the Series Q Warrants are entitled to acquire options, convertible securities or rights to purchase our securities or property granted, issued or sold pro rata to the holders of our Common Stock on an “as if exercised for Common Stock” basis. The Series Q Warrants prohibit us from entering into transactions constituting a Fundamental Transaction (as defined in the Series Q Warrants) unless the successor entity assumes all of our obligations under the Series Q Warrants and the other transaction documents in a written agreement approved by the Required Holders (as defined in the Series Q Warrants). The definition of Fundamental Transactions includes, but is not limited to, mergers, a sale of all or substantially all of our assets, certain tender offers and other transactions that result in a change of control. Further, in connection with a Change of Control (as defined in the Series Q Warrants), upon request of a holder of a Series Q Warrant, we or the Successor Entity (as defined in the Series Q Warrants), as the case may be, shall exchange a Series Q Warrant for consideration equal to the Black Scholes Value (as defined in the Series Q Warrants) of such portion of such Series Q Warrant subject to exchange in the form of, at our election, either (i) rights convertible into the Corporate Event Consideration (as defined in the Series Q Warrants) applicable to the Change of Control (as defined in the Series Q Warrants) event, or (ii) cash. The definition of Change of Control is generally the same as the definition of Fundamental Transaction but excludes certain types of Fundamental Transactions. Further, after the occurrence of an Event of Default (as defined in the 2018 Notes), at the request of a holder of a Series Q Warrant, we or the Successor Entity (as defined in the Series Q Warrants), as the case may be, shall purchase such holders Series Q Warrant for cash in an amount equal to the Event of Default Black Scholes Value (as defined in the Series Q Warrants. The April 2018 PA Warrants have substantially the same terms as the Series Q Warrants other than that they (i) have 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 Common Stock issuable upon exercise of the April 2018 PA Warrants, and (ii) pursuant to FINRA rules, the April 2018 PA Warrants and the underlying securities are subject to certain restrictions on transfer.
April 2019 PA Warrants
The April 2019 PA Warrants have similar terms to the Series R Warrants other than that they (i) are exercisable through a cashless exercise regardless of whether the shares of Common Stock issuable upon exercise of the April 2019 PA Warrants are covered by a registration statement under the Securities Act but only based on the net number of shares; (ii) certain covenants appearing in the Series R Warrants were removed in the April 2019 PA Warrants; (iii) the initial beneficial ownership limitation was set at 4.99%; (iv) the April 2019 PA Warrants have certain demand and piggyback registration rights with respect to the shares issuable upon exercise of the April 2019 PA Warrants; and (v) pursuant to FINRA rules, the April 2019 PA Warrants and the underlying securities are subject to certain restrictions on transfer. USE OF PROCEEDS If all of the Series R Warrants and Series S Warrants are exercised for cash (assuming no exercise price adjustments), we estimate that the total net proceeds of such exercises, after deducting estimated expenses of this offering of approximately $70,000, would be approximately $3.4 million, which we will use (i) in connection with the commercialization of the POWERHOUSE™ product, and (ii) for general corporate purposes, including, without limitation, for working capital purposes, to increase sales and operational capabilities, but not for (i) the satisfaction of any portion of our debt (other than pursuant to trade payables in the ordinary course of our business and prior practices), (ii) the redemption of any Common Stock or security exercisable or convertible into Common Stock, (iii) for the settlement of any outstanding litigation, or (iv) in violation of regulation under the Foreign Corrupt Practices Act of 1977, as amended, or regulations by the Office of Foreign Assets Control of the U.S. Treasury Department. This prospectus also relates to shares of Common Stock that may be offered and sold from time to time by certain selling shareholders. We will not receive any proceeds from the sale of the shares of Common Stock by the selling shareholders. If all of the Private Warrants are exercised for cash (assuming no exercise price adjustments), we estimate that the total net proceeds of such exercises, after deducting estimated expenses of filing the registration statement of which this prospectus is a part of approximately $70,000, would be approximately $8.8 million, which we will use for general corporate purposes. As of the date of this prospectus, remainswe cannot specify with certainty all of the sameparticular uses for the net proceeds we will have upon completion of the offering or the order of priority in which we may use such proceeds. Accordingly, we will retain broad discretion over the use of these proceeds. If at any time after the Warrants are exercisable there is no effective registration statement on file with the SEC registering, or no current prospectus available for, the issuance or resale of the shares of our Common Stock issuable upon exercise of the Warrants, or under certain other circumstances, see the section entitled “Description of Warrants” beginning on page 36, the Warrants may be exercised by means of a “cashless exercise” and after deductingwe will not receive any proceeds at such time. The selling shareholders will pay all underwriting discounts, andselling commissions and estimatedexpenses incurred by them for brokerage, accounting, tax or legal services or any other expenses incurred by the selling shareholders in connection with the sale of the shares, if any. We will bear all other costs, fees and expenses incurred in effecting the registration of the shares covered by this prospectus, including, without limitation, all registration and filing fees, OTCQX fees and fees and expenses of our counsel and our accountants. DILUTION Dilution is the amount by which the exercise price paid by the holders of the Series R Warrants and the Series S Warrants to purchase the underlying shares of Common Stock offered under this prospectus will exceed the as-adjusted net tangible book value per share of Common Stock after such exercise. Net tangible book value (deficit) per share of our Common Stock as of a particular date represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of Common Stock outstanding as of such date. As of December 31, 2018, our net tangible book value (deficit) was approximately $7.6 million, or $0.08 per share of Common Stock based on there being 91,859,635 shares of our Common Stock outstanding as of December 31, 2018. Purchasers of our Common Stock upon exercise of the Series R Warrants will experience substantial and immediate dilution in net tangible book value per share of Common Stock for financial accounting purposes, as illustrated in the following tables. The tables below assume that all of the Series R Warrants and the Series S Warrants are exercised for cash and are based on there being 109,693,125 shares of Common Stock outstanding as of April 29, 2019. | Series R Warrants | | | | | Exercise price per share | | $ | 0.20 | | | Net tangible book value per share as of December 31, 2018 | | $ | 0.08 | | | Increase in pro forma net tangible book value from conversion of convertible notes into Common Stock between December 31, 2018 and April 9, 2019 and related to the April 2, 2019 offering | | | 0.02 | | | Increase in pro forma net tangible book value per share attributable to purchasers of Common Stock under Series R Warrants | | $ | 0.01 | | | Adjusted net tangible book value per share after giving effect to the purchase of Common Stock under the Series R Warrants | | $ | 0.11 | | | Dilution in net tangible book value per share to purchasers of Common Stock under Series R Warrants | | $ | 0.09 | |
| Series S Warrants | | | | | Exercise price per share | | $ | 0.01 | | | Net tangible book value per share as of December 31, 2018 | | $ | 0.08 | | | Increase in pro forma net tangible book value from conversion of convertible notes into Common Stock between December 31, 2018 and April 9, 2019 and related to the April 2, 2019 offering | | | 0.02 | | | Increase in pro forma net tangible book value per share attributable to purchasers of Common Stock under Series S Warrants | | $ | 0.00 | | | Adjusted net tangible book value per share after giving effect to the purchase of Common Stock under the Series S Warrants | | $ | 0.10 | | | (Increase) in net tangible book value per share to purchasers of Common Stock under Series S Warrants | | $ | (0.09 | ) |
The tables above do not take into account any shares of Common Stock issuable in the future upon the exercise or conversion of currently outstanding derivative securities other than, in each case, the Warrant series covered by each table. We may in the future sell substantial additional amounts of Common Stock or securities convertible into or exercisable for Common Stock. We may also choose to raise additional capital due to market conditions or other strategic considerations even if we believe we have sufficient funds for our current or future operating plans. The issuance of these securities could result in further dilution to our shareholders. SELLING SHAREHOLDERS The shares of Common Stock being offered by the selling shareholders consist of shares of Common Stock issuable upon exercise of outstanding Private Warrants. Pursuant to agreements entered into with some of the selling shareholders, we are required to register for resale 135% of the number of shares of Common Stock issuable upon exercise of Series Q Warrants. For additional information regarding the issuance of the Private Warrants, see “DESCRIPTION OF THE TRANSACTION” above. We are registering the shares of Common Stock in order to permit the selling shareholders to offer the shares for resale from time to time. Except for the ownership of the Private Warrants and other warrants or as described in the table below, the selling shareholders have not had any material relationship with us within the past three years. The table below lists the selling shareholders and other information regarding the beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder) of the shares of Common Stock held by each of the selling shareholders. The second column lists the number of shares of Common Stock beneficially owned by the selling shareholders, based on information available to us and their respective ownership of shares of Common Stock and warrants, as of April 29, 2019, assuming exercise of the warrants held by each such selling shareholder on that date but taking account of any limitations on exercise set forth therein. The second column assumes that a selling shareholder first exercises warrants with a limitation on exercise of 4.99% or less before exercising any warrants with a limitation on exercise in excess of 4.99%. The third column lists the shares of Common Stock being offered by this prospectus by the selling shareholders and does not take in account any limitations on exercise of the warrants set forth therein. The fourth and fifth columns assume the sale of all of the shares offered by the selling shareholders pursuant to this prospectus. Under the terms of the Private Warrants, a selling shareholder may not exercise the Private Warrants to the extent (but only to the extent) such selling shareholder or any of its affiliates would beneficially own a number of shares of our Common Stock which would exceed a specified percentage, not exceeding 9.99%, as elected by each selling shareholder, of our outstanding Common Stock. The number of shares in the second, fourth and fifth columns reflects these limitations. The selling shareholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.” All of the Private Warrants are currently exercisable. | Name of Selling Shareholder | | Number of Shares
of Common Stock
Owned Prior to
Offering | | | Maximum Number
of Shares of
Common Stock to
be Sold Pursuant to
this Prospectus | | | Number of
Shares of
Common Stock
Owned After
Offering | | | Percentage of
Shares of
Common Stock
Owned After
Offering (to the
extent greater
than 1%) | | | | | | | | | | | | | | | | | Hudson Bay Master Fund Ltd.(1) | | | 9,116,707 | (2) | | | 1,738,100 | (3) | | | 8,070,011 | (2) | | | 6.80 | % | | | | | | | | | | | | | | | | | | | | Intracoastal Capital, LLC(4) | | | 8,942,342 | (5) | | | 8 | (6) | | | 8,924,334 | (5) | | | 8.15 | % | | | | | | | | | | | | | | | | | | | | Alto Opportunity Fund, SPC – Segregated Master Portfolio B(7) | | | 5,747,566 | (8) | | | 97,222 | (9) | | | 5,752,672 | (8) | | | 4.99 | % | | | | | | | | | | | | | | | | | | | | Dawson James Securities Inc.(10) | | | 764,210 | (11) | | | 764,210 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Jonathan Blum(12) | | | 539,125 | (13) | | | 539,125 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Brandon Ross(14) | | | 539,014 | (15) | | | 539,014 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Iroquois Master Fund Ltd.(16) | | | 533,110 | (17) | | | 5 | (6) | | | 533,105 | | | | * | | | | | | | | | | | | | | | | | | | | | WestPark Capital, Inc.(18) | | | 370,490 | (19) | | | 370,490 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Roth Capital Partners, LLC (20) | | | 337,745 | (21) | | | 337,745 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Empery Asset Master Ltd (22) | | | 299,786 | (17) | | | 591 | (23) | | | 264,418 | | | | * | | | | | | | | | | | | | | | | | | | | | Empery Tax Efficient II, LP (24) | | | 229,232 | (17) | | | 215 | (23) | | | 205,694 | | | | * | | | | | | | | | | | | | | | | | | | | | Empery Tax Efficient, LP (25) | | | 147,987 | (17) | | | 439 | (23) | | | 129,889 | | | | * | | | | | | | | | | | | | | | | | | | | | Doug Kaiser(26) | | | 17,510 | (27) | | | 17,510 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Frank Salvatore(28) | | | 17,510 | (29) | | | 17,510 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Alto Opportunity Fund, SPC – Segregated Master Portfolio A(30) | | | 2,075(31) | | | | 2.075 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | 683 Capital Partners, LP (32) | | | 16 | (6) | | | 16 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Alder Capital Partners, LP (33) | | | 10 | (6) | | | 10 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Capital Ventures International (34) | | | 9 | (6) | | | 9 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | OTA, LLC (35) | | | 9 | (6) | | | 9 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Julie Kamps (36) | | | 9 | (37) | | | 9 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Anson Investments Master Fund LP (38) | | | 5 | (6) | | | 5 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | BTG Investments, LLC (39) | | | 5 | (6) | | | 5 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Palisade Long Short Alpha Master Fund (Cayman) Limited(40) | | | 5 | (6) | | | 5 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Jason Stern(41) | | | 1 | (42) | | | 1 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Gordon Roth (43) | | | 1 | (6) | | | 1 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Jesse Pichel (44) | | | 1 | (6) | | | 1 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | John Chambers (45) | | | 1 | (6) | | | 1 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | John Weber (46) | | | 1 | (6) | | | 1 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Michael Aaron Margolis (47) | | | 1 | (6) | | | 1 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Michael Chill (48) | | | 1 | (6) | | | 1 | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | Theodore Roth (49) | | | 1 | (6) | | | 1 | | | | - | | | | - | |
* Denotes less than 1%. (1) Hudson Bay Master Fund Ltd. - Hudson Bay Capital Management LP, the investment manager of Hudson Bay Master Fund Ltd., has voting and investment power over these securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management LP. Hudson Bay Capital Management LP may be deemed to be the beneficial owner of all shares of Class A common stock underlying the securities held by Hudson Bay Master Fund Ltd. Mr. Gerber disclaims beneficial ownership of these securities. (2) Column 2 consists of (i) 832,031 shares of Common Stock and (ii) 8,284,676 shares of Common Stock issuable upon exercise of warrants (subject to 4.99% and 9.99% beneficial ownership limitations). Does not include 691,332 additional shares of Common Stock issuable under warrants because the selling shareholder does not have the right to receive such shares if the selling shareholder, together with certain attribution parties, would beneficially own in excess of 4.99% of the outstanding shares of our Common Stock. Column 4 consists of (i) 832,031 shares of Common Stock and (ii) 7,237,980 shares of Common Stock issuable upon exercise of warrants. (3) Consists of (i) 5 shares of Common Stock issuable upon exercise of July 2014 Warrants, (ii) 1,600,000 shares of Common Stock issuable upon exercise of Series O Warrants, and (ii) 138,095 shares of Common Stock issuable upon exercise of Series Q Warrants. (4) Intracoastal Capital, LLC - Intracoastal Capital LLC, Mitchell P. Kopin and Daniel B. Asher share voting and dispositive power over the shares. Mr. Kopin and Mr. Asher, each of whom are managers of Intracoastal Capital LLC, share voting control and investment discretion over the securities held by Intracoastal. As a result, each of Mr. Kopin and Mr. Asher may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of the securities held by Intracoastal Capital LLC. (5) Column 2 consists of (i) 3,255,658 shares of Common Stock and (ii) 5,686,684 shares of Common Stock issuable upon exercise of warrants. Column 4 consists of (i) 3,255,658 shares of Common Stock and (ii) 5,686,676 shares of Common Stock issuable upon exercise of warrants. (6) Consists of shares of Common Stock issuable upon exercise of July 2014 Warrants. (7) Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B - Ayrton Capital LLC, the investment manager to Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B, has discretionary authority to vote and dispose of the shares held by Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B. Waqas Khatri is the managing member of Ayrton Capital LLC and in his capacity as director of Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B, may also be deemed to have investment discretion and voting power over the shares held by Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B. Mr. Khatri disclaims any beneficial ownership of these shares. (8) Column 2 consists of (i) 205,000 shares of Common Stock and (ii) 5,542,566 shares of Common Stock issuable upon exercise of warrants (subject to a 4.99% beneficial ownership limitation) and does not include 2,044,751 additional shares of Common Stock issuable under warrants because the selling shareholder does not have the right to receive such shares if the selling shareholder, together with certain attribution parties, would beneficially own in excess of 4.99% of the outstanding shares of our Common Stock. Column 4 consists of (i) 205,000 shares of Common Stock and (ii) 5,547,672 shares of Common Stock issuable upon exercise of warrants (subject to a 4.99% beneficial ownership limitation) and does not include 1,902,422 additional shares of Common Stock issuable under warrants because the selling shareholder does not have the right to receive such shares if the selling shareholder, together with certain attribution parties, would beneficially own in excess of 4.99% of the outstanding shares of our Common Stock. (9) Consists of 97,222 shares of Common Stock issuable upon exercise of Series Q Warrants. (10) Dawson James Securities Inc. - Dawson James Securities Inc. acted as our placement agent in our April 2, 2019 offering expenses payableof Common Stock and warrants and purchased the April 2019 PA Warrants in connection therewith. Robert D. Keyser, who, as CEO of Dawson James Securities has voting and investment power over these securities, may be deemed to be the beneficial owner of all shares of Common Stock underlying the securities held by us.Dawson James Securities. Mr. Keyser disclaims beneficial ownership of these securities. It is our understanding that Dawson James Securities Inc. purchased the April 2019 PA Warrants in the ordinary course of business, and at the time of purchase, Dawson James Securities Inc. had no agreements or understanding, directly or indirectly, with any person to distribute the April 2019 PA Warrants or the underlying Common Stock. (11) Consists of shares of Common Stock issuable upon exercise of April 2019 PA Warrants. (12) Jonathan Blum - Mr. Blum is an employee of Dawson James Securities Inc. and a former employee of WestPark, each of which has acted as our placement agent in past securities offerings in which he acquired his warrants. It is our understanding that Mr. Blum acquired his warrants in the ordinary course of business, and at the time of purchase, he had no agreements or understanding, directly or indirectly, with any person to distribute such warrants or the underlying Common Stock. (13) Consists of (i) 13 shares of Common Stock issuable upon exercise of a February 2015 PA Warrant, (ii) 1 share of Common Stock issuable upon exercise of a June 2015 PA Warrant, (iii) 32,450 shares of Common Stock issuable upon exercise of a January 2018 PA Warrant, (iv) 193,919 shares of Common Stock issuable under an April 2018 PA Warrants, and (v) 312,632 shares of Common Stock issuable under a April 2019 PA Warrant. (14) Brandon Ross - Mr. Ross is an employee of Dawson James Securities Inc. and a former employee of WestPark, each of which has acted as our placement agent in past securities offerings in which he acquired his warrants. It is our understanding that Mr. Ross acquired his warrants in the ordinary course of business, and at the time of purchase, he had no agreements or understanding, directly or indirectly, with any person to distribute such warrants or the underlying Common Stock. (15) Consists of (i) 13 shares of Common Stock issuable upon exercise of a February 2015 PA Warrant, (ii) 32,450 shares of Common Stock issuable upon exercise of a January 2018 PA Warrant, (iii) 193,919 shares of Common Stock issuable under an April 2018 PA Warrants, and (iv) 312,632 shares of Common Stock issuable under a April 2019 PA Warrant. (16) Iroquois Master Fund Ltd. - Richard Abbe, who serves as the President of Iroquois Capital Management, LLC and managing member of Iroquois Capital Investment Group LLC, and Kimberly Page, who serves as a Director of Iroquois Master Fund Ltd., have shared voting and investment power over the securities held by Iroquois Master Fund Ltd. As a result, Iroquois Master Fund Ltd., Iroquois Capital Management, LLC, Mr. Abbe and Ms. Page each may be deemed beneficial owners of, and share voting and investment power over these securities. (17) Consists of shares of Common Stock issuable upon exercise of warrants. (18) WestPark Capital, Inc. – Richard Rappaport, in his capacity as Chief Executive Officer of WestPark has voting and investment power over the securities held by WestPark. Mr. Rappaport disclaims beneficial ownership of the shares of Common Stock not owned by him. WestPark has acted as our placement agent in past securities offerings. It is our understanding that WestPark purchased the warrants in the ordinary course of business, and at the time of purchase, WestPark had no agreements or understanding, directly or indirectly, with any person to distribute the warrants or the underlying Common Stock. (19) Consists of (i) 20 shares of Common Stock issuable upon exercise of February 2015 PA Warrants, (ii) 48 shares of Common Stock issuable upon exercise of June 2015 PA Warrants, (iii) 53,100 shares of Common Stock issuable upon exercise of January 2018 PA Warrants, and (iv) 317,322 shares of Common Stock issuable under April 2018 PA Warrants. (20) Roth Capital Partners, LLC - We do not expecthave any information about the beneficial ownership of these securities. Roth has acted as our placement agent in past securities offerings. It is our understanding that a changeRoth acquired the warrants in the ordinary course of business, and at the time of purchase, Roth had no agreements or understanding, directly or indirectly, with any person to distribute the warrants or the underlying Common Stock (21) Consists of (i) 1,411 shares of Common Stock issuable upon exercise of an April 2016 PA Warrant, (ii) 30,834 shares of Common Stock issuable upon exercise of a December 2016 PA Warrant, (iii) 185,500 shares of Common Stock issuable upon exercise of a February 6, 2017 PA Warrant, and (iv) 120,000 shares of Common Stock issuable upon exercise of a February 9, 2017 PA Warrant. (22) Empery Asset Master Ltd - Empery Asset Management LP, the authorized agent of Empery Asset Master Ltd ("EAM"), has discretionary authority to vote and dispose of the shares held by EAM and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the shares held by EAM. EAM, Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares. (23) Consists of shares of Common Stock issuable upon exercise of Series G Warrants. (24) Empery Tax Efficient II, LP - Empery Asset Management LP, the authorized agent of Empery Tax Efficient II, LP ("ETE II"), has discretionary authority to vote and dispose of the shares held by ETE II and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the shares held by ETE II. ETE II, Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares. (25) Empery Tax Efficient, LP - Empery Asset Management LP, the authorized agent of Empery Tax Efficient, LP ("ETE"), has discretionary authority to vote and dispose of the shares held by ETE and may be deemed to be the beneficial owner of these shares. Martin Hoe and Ryan Lane, in their capacity as investment managers of Empery Asset Management LP, may also be deemed to have investment discretion and voting power over the shares held by ETE. ETE, Mr. Hoe and Mr. Lane each disclaim any beneficial ownership of these shares. (26) Doug Kaiser - Mr. Kaiser was (and still may be) an employee of WestPark when he acquired his warrants. WestPark acted as our placement agent in past securities offerings in which he acquired his warrants. It is our understanding that Mr. Kaiser acquired his warrants in the ordinary course of business, and at the time of purchase, he had no agreements or understanding, directly or indirectly, with any person to distribute such warrants or the underlying Common Stock. (27) Consists of (i) 1 share of Common Stock issuable upon exercise of a February 2015 PA Warrant, (ii) 9 share of Common Stock issuable upon exercise of June 2015 PA Warrants, (iii) 5,000 shares of Common Stock issuable upon exercise of January 2018 PA Warrants, and (iv) 12,500 shares of Common Stock issuable under April 2018 PA Warrants. (28) Frank Salvatore - Mr. Salvatore was (and still may be) an employee of WestPark when he acquired his warrants. WestPark acted as our placement agent in past securities offerings in which he acquired his warrants. It is our understanding that Mr. Kaiser acquired his warrants in the ordinary course of business, and at the time of purchase, he had no agreements or understanding, directly or indirectly, with any person to distribute such warrants or the underlying Common Stock. (29) Consists of (i) 1 share of Common Stock issuable upon exercise of February 2015 PA Warrants, (ii) 9 share of Common Stock issuable upon exercise of June 2015 PA Warrants, (iii) 5,000 shares of Common Stock issuable upon exercise of January 2018 PA Warrants, and (iv) 12,500 shares of Common Stock issuable under April 2018 PA Warrants. (30) Alto Opportunity Master Fund, SPC – Segregated Master Portfolio A - Ayrton Capital LLC, the investment manager to Alto Opportunity Master Fund, SPC – Segregated Master Portfolio A, has discretionary authority to vote and dispose of the shares held by Alto Opportunity Master Fund, SPC – Segregated Master Portfolio A. Waqas Khatri is the managing member of Ayrton Capital LLC and in his capacity as director of Alto Opportunity Master Fund, SPC – Segregated Master Portfolio A, may also be deemed to have investment discretion and voting power over the shares held by Alto Opportunity Master Fund, SPC – Segregated Master Portfolio A. Mr. Khatri disclaims any beneficial ownership of these shares. (31) Consists of 2,075 shares of Common Stock issuable upon exercise of Series G Warrants. (32) 683 Capital Partners, LP – We do not have any information about the beneficial ownership of these securities. (33) Alder Capital Partners, LP - We do not have any information about the beneficial ownership of these securities. (34) Capital Ventures International - We do not have any information about the beneficial ownership of these securities. (35) OTA, LLC - We do not have any information about the beneficial ownership of these securities. (36) Julie Kamps - Ms. Kamps was (and still may be) an employee of WestPark when she acquired her warrants. WestPark acted as placement agent for several of our past securities offerings in which she acquired her warrants. It is our understanding that Ms. Kamps acquired her warrants in the ordinary course of business, and at the time of purchase, she had no agreements or understanding, directly or indirectly, with any person to distribute such warrants or the underlying Common Stock. (37) Consists of shares of Common Stock issuable upon exercise of June 2015 PA Warrants. (38) Anson Investments Master Fund LP - Moez Kassem has authority to vote and dispose of the shares held by Anson Investments Master Fund LP and may be deemed the beneficial owner of the shares. (39) BTG Investments, LLC - We do not have any information about the beneficial ownership of these securities. (40) Palisade Long Short Alpha Master Fund (Cayman) Limited - We do not have any information about the beneficial ownership of these securities. (41) Jason Stern - Mr. Stern was (and still may be) an employee of WestPark when he acquired his warrants. WestPark acted as placement agent for several of our past securities offerings in which he acquired his warrants. It is our understanding that Mr. Stern acquired his warrants in the ordinary course of business, and at the time of purchase, he had no agreements or understanding, directly or indirectly, with any person to distribute such warrants or the underlying Common Stock. (42) Consists of shares of Common Stock issuable upon exercise of February 2015 PA Warrants. (43) Gordon Roth - Mr. Roth was (and still may be) affiliated with Roth, who acted as placement agent for our July 9, 2014 private placement in which he acquired the securities. It is our understanding that Mr. Roth acquired the registrable securities in the ordinary course of business, and at the time of the purchase of the purchase of the registrable securities to be resold, Mr. Roth had no agreements or understanding, directly or indirectly, with any person to distribute the registrable securities. (44) Jesse Pichel - Mr. Pichel was (and still may be) affiliated with Roth, who acted as placement agent for our July 9, 2014 private placement in which he acquired the securities. It is our understanding that Mr. Pichel acquired the registrable securities in the ordinary course of business, and at the time of the purchase of the purchase of the registrable securities to be resold, Mr. Pichel had no agreements or understanding, directly or indirectly, with any person to distribute the registrable securities. (45) John Chambers - Mr. Chambers was (and still may be) affiliated with Roth, who acted as placement agent for our July 9, 2014 private placement in which he acquired the securities. It is our understanding that Mr. Chambers acquired the registrable securities in the ordinary course of business, and at the time of the purchase of the purchase of the registrable securities to be resold, Mr. Chambers had no agreements or understanding, directly or indirectly, with any person to distribute the registrable securities. (46) John Weber - Mr. Weber was (and still may be) affiliated with Roth, who acted as placement agent for our July 9, 2014 private placement in which he acquired the securities. It is our understanding that Mr. Weber acquired the registrable securities in the ordinary course of business, and at the time of the purchase of the purchase of the registrable securities to be resold, had no agreements or understanding, directly or indirectly, with any person to distribute the registrable securities. (47) Michael Aaron Margolis - Mr. Margolis is was (and still may be) affiliated with Roth, who acted as placement agent for our July 9, 2014 private placement in which he acquired the securities. It is our understanding that Mr. Margolis acquired the registrable securities in the ordinary course of business, and at the time of the purchase of the purchase of the registrable securities to be resold, Mr. Margolis had no agreements or understanding, directly or indirectly, with any person to distribute the registrable securities. (48) Michael Chill - Mr. Chill was (and still may be) affiliated with Roth, who acted as placement agent for our July 9, 2014 private placement in which he acquired the securities. It is our understanding that Mr. Chill acquired the registrable securities in the ordinary course of business, and at the time of the purchase of the purchase of the registrable securities to be resold, Mr. Chill had no agreements or understanding, directly or indirectly, with any person to distribute the registrable securities. (49) Theodore Roth - Mr. Roth was (and still may be) affiliated with Roth, who acted as placement agent for our July 9, 2014 private placement in which he acquired the securities. It is our understanding that Mr. Roth acquired the registrable securities in the ordinary course of business, and at the time of the purchase of the purchase of the registrable securities to be resold, Mr. Roth had no agreements or understanding, directly or indirectly, with any person to distribute the registrable securities. PLAN OF DISTRIBUTION From time to time after the date of this prospectus, we will directly offer and issue the shares of Common Stock issuable under the Shelf Warrants to the holders upon the exercise of the Shelf Warrants in accordance with their terms. For the holders to exercise the Shelf Warrants, there must be an effective registration statement and a current prospectus under the Securities Act covering the offering price would haveand sale of Common Stock issuable upon the exercise of the Shelf Warrants or an available exemption from registration under the Securities Act. If at any time there is no effective registration statement on file with the SEC registering, or no current prospectus available for, the issuance or resale of the shares of our Common Stock issuable upon exercise of the Shelf Warrants, the Shelf Warrants may be exercised by means of a material effect on our uses“cashless exercise” and we will not receive any proceeds at such time. We are also registering the shares of Common Stock issuable upon exercise of the Private Warrants to permit the resale of these shares of Common Stock by the selling shareholders from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling shareholders of the shares of Common Stock issuable upon exercise of the Private Warrants, although we will receive the exercise price of any Private Warrants not exercised by the selling shareholders on a cashless exercise basis. The selling shareholders may sell all or a portion of the shares of Common Stock issuable upon exercise of the Private Warrants held by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of Common Stock issuable upon exercise of the Private Warrants are sold through underwriters or broker-dealers, the selling shareholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of Common Stock issuable upon exercise of the Private Warrants may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions, pursuant to one or more of the following methods: | · | on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale; |
| · | in the over-the-counter market; |
| · | in transactions otherwise than on these exchanges or systems or in the over-the-counter market; |
| · | through the writing or settlement of options, whether such options are listed on an options exchange or otherwise; |
| · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| · | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| · | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| · | an exchange distribution in accordance with the rules of the applicable exchange; |
| · | privately negotiated transactions; |
| · | short sales made after the date the registration statement is declared effective by the SEC; |
| · | broker-dealers may agree with a selling shareholder to sell a specified number of such shares at a stipulated price per share; |
| · | a combination of any such methods of sale; and |
| · | any other method permitted pursuant to applicable law. |
The selling shareholders may also sell shares of Common Stock issuable upon exercise of the Private Warrants under Rule 144, if available, rather than under this prospectus. In addition, the selling shareholders may transfer the shares of Common Stock issuable upon exercise of the Private Warrants by other means not described in this prospectus. If the selling shareholders effect such transactions by selling shares of Common Stock issuable upon exercise of the Private Warrants to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling shareholders or commissions from purchasers of the shares of Common Stock issuable upon exercise of the Private Warrants for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of Common Stock issuable upon exercise of the Private Warrants or otherwise, the selling shareholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of Common Stock issuable upon exercise of the Private Warrants in the course of hedging in positions they assume. The selling shareholders may also sell shares of Common Stock issuable upon exercise of the Private Warrants short and deliver shares of Common Stock issuable upon exercise of the Private Warrants covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling shareholders may also loan or pledge shares of Common Stock issuable upon exercise of the Private Warrants to broker-dealers that in turn may sell such shares. The selling shareholders may pledge or grant a security interest in some or all of the Private Warrants or shares of Common Stock issuable upon exercise of the Private Warrants by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of Common Stock issuable upon exercise of the Private Warrants from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending, if necessary, the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this prospectus. The selling shareholders also may transfer and donate the shares of Common Stock issuable upon exercise of the Private Warrants in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. To the extent required by the Securities Act and the rules and regulations thereunder, the selling shareholders and any broker-dealer participating in the distribution of the shares of Common Stock issuable upon exercise of the Private Warrants may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering althoughof the shares of Common Stock issuable upon exercise of the Private Warrants is made, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of Common Stock issuable upon exercise of the Private Warrants being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling shareholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers. Under the securities laws of some states, the shares of Common Stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of Common Stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. There can be no assurance that any selling shareholder will sell any or all of the shares of Common Stock issuable upon exercise of the Private Warrants registered pursuant to this registration statement, of which this prospectus forms a part. The selling shareholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act, and the rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of Common Stock issuable upon exercise of the Private Warrants by the selling shareholders and any other participating person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares of Common Stock issuable upon exercise of the Private Warrants to engage in market-making activities with respect to the shares of Common Stock issuable upon exercise of the Private Warrants. All of the foregoing may affect the marketability of the shares of Common Stock issuable upon exercise of the Private Warrants and the ability of any person or entity to engage in market-making activities with respect to the shares of Common Stock issuable upon exercise of the Private Warrants. We will pay all expenses of the registration of the shares of Common Stock issuable upon exercise of the Warrants, estimated to be $70,000 in total, including, without limitation, SEC filing fees and expenses of compliance with state securities or “blue sky” laws. A selling shareholder will pay all underwriting discounts and selling commissions, if any. Under the terms of agreements entered into with some of the selling shareholders, we will indemnify the selling shareholders against liabilities, including some liabilities under the Securities Act or the selling shareholders will be entitled to contribution. Under the terms of such agreements, we may be indemnified by the selling shareholders against civil liabilities, including liabilities under the Securities Act that may arise from any written information furnished to us by the selling shareholder specifically for use in this prospectus or we may be entitled to contribution. Once issued under the registration statement of which this prospectus forms a part, the shares of Common Stock issuable upon exercise of the Shelf Warrants will be freely tradable in the hands of persons other than our affiliates. Once resold under the registration statement of which this prospectus forms a part, the shares of Common Stock issuable upon exercise of the Private Warrants will be freely tradable in the hands of persons other than our affiliates. DESCRIPTION OF SECURITIES TO BE OFFERED Description of Common Stock Our authorized Common Stock consists of 150,000,000 shares of Common Stock. As of April 29, 2019, there were 109,639,125 shares of our Common Stock outstanding. Although we believe the following summary description of our Common Stock set forth below is accurate, our articles of incorporation and our bylaws cover all material provisions affecting the rights of holders of our Common Stock. This summary is not intended to be complete and is qualified by reference to the provisions of applicable law and to our articles of incorporation and bylaws. Voting Rights
Each holder of shares of Common Stock is entitled to one vote for each share held on all matters submitted to a vote of shareholders. There are no cumulative voting rights. All holders of shares of Common Stock vote as a single group on all matters that are submitted to the shareholders for a vote. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors who stand for election. Our entire Board of Directors stands for election each year. A required number of shareholders having the minimum number of votes that would be necessary to authorize or take action at a meeting at which all of the shares entitled to vote thereon were present and voted may consent to an action in writing and without a meeting under certain circumstances. Dividends and Liquidation
Subject to any preferential rights of any outstanding shares of preferred stock, if any, shares of Common Stock are entitled to receive dividends, if any, as may be declared by our Board of Directors out of legally available funds. In the event of a liquidation, dissolution or winding up of our company, the shares of Common Stock are entitled to our assets remaining after the payment of all of our debts and other liabilities, including preferential payments made to holders of any outstanding shares of preferred stock. Holders of shares of Common Stock have no preemptive, subscription or redemption rights, and there are no redemption or sinking fund provisions applicable to the shares of Common Stock. Anti-Takeover Effects of Our Articles of Incorporation and Bylaws
The following provisions, which are contained in our articles of incorporation or bylaws, could have the effect of delaying, deferring or preventing a change in control of our company. Our articles of incorporation and bylaws provide that our board may consist of any number of directors, which may be fixed from time to time by our board. Newly created directorships resulting from any increase in our authorized number of directors may be filled by the affirmative vote of a majority of the directors then in office or by an election at an annual meeting or special meeting of shareholders called for that purpose. Any vacancies on our board resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled a majority of our board then in office, even if less than a quorum is remaining in office. Our bylaws require advance notice by a shareholder of any proposal to be brought before an annual meeting of shareholders by a shareholder, including any nomination for election of directors by any shareholder entitled to vote for the election of directors at the meeting. Our bylaws also provide that no shareholder proposal may be considered at a meeting of our shareholders unless the proposal relates to a matter on which a shareholder vote is required by our charter, bylaws or by applicable law. Our Board of Directors has the power to issue preferred stock with designations, preferences, limitations and relative rights determined by the Board of Directors without any vote or action by shareholders. The issuance of preferred stock or of rights to purchase preferred stock could have the effect of making it more difficult for a third party to acquire Real Goods Solar, or of discouraging a third party from attempting to acquire Real Goods Solar. Subject to repeal or change by action of our shareholders, our board may impactamend, supplement or repeal our bylaws or adopt new bylaws. Registration Rights
We have entered into registration rights agreements or otherwise agreed to register the issuance or resale of the shares of Common Stock issuable upon exercise of certain Warrants. Where applicable, we may be subject to monetary penalties if a registration statement is not available for the issuance or resale of the shares of Common Stock issuable upon exercise of some of the Warrants. We believe we have satisfied all current registration obligations owed to holders of Warrants to date and are filing the registration statement of which this prospectus is a part voluntarily. Description of Warrants The descriptions of the Warrants under the section entitled “Description of the Transaction – Description of the Warrants” is incorporated herein by this reference. DESCRIPTION OF BUSINESS Overview RGS Energy and its subsidiaries have provided solar energy systems to homeowners, and commercial building owners in the United States since 1978. We believe that solar energy adoption is still in the early stages and will continue to increase as utility rates rise and customers become more knowledgeable about the savings clean and sustainable solar energy can deliver. RGS and our predecessors have installed over 26,000 solar energy systems across the continental United States and Hawaii. We endeavor to make the move to solar energy simple for our customers by managing and executing the process with our sales and installation teams. We design and offer a suitable solar energy solution, then procure, permit, install, and interconnect the system to the utility grid. We provide a comprehensive workmanship warranty on each fully operational system. On September 29, 2017 we executed the License with Dow for 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 has been developed with traditional silicon solar cells to increase solar production and to provide a competitive consumer price point. On November 2, 2018 we received UL certification for POWERHOUSE™ 3.0 and began to commercialize the product in North America. We have engaged third-party manufacturers for production and distribution logistics and to provide services to the home building and roofing industries. We were incorporated in Colorado in 2008 as a successor to Gaiam Energy Tech, Inc. founded in 1999. A description about our operating segments and the financial information about our segments may be found in Note 15. Segment Information, to our audited financial statements, included in Item 8 of the Financial Statements included in this prospectus. Business Strategy Our goals are to (i) provide solar solutions that save residential and commercial customers’ money and (ii) operate our Company at a profit. Our strategies to achieve these goals are: | • | Commercialize the POWERHOUSE™ 3.0 in-roof solar shingle.We have executed an exclusive domestic and international world-wide License with Dow for its POWERHOUSE™ 3.0 in-roof solar shingle to provide customers with a more aesthetically pleasing solar shingle system. We plan to sell the product directly to homebuilders and develop a network of authorized roofers. We have started to market POWERHOUSE™ 3.0 in the United States and hope to expand internationally in the future. We believe that as we have just started manufacturing and marketing POWERHOUSE™, it will take us several quarters to commercialize this new product and achieve a balance between customer demand and the manufacturing production by our contract supply chain. We believe that we will require time to build brand awareness for this new product and, accordingly, we expect our sales to begin slowly and grow in future periods. |
| • | Utilize our call center.In past years, we have built a call center in our headquarters in Colorado to conduct sales via the phone and internet. This provides a cost-effective mechanism to reach potential customers and enter new markets. Call center personnel have access to engineering, operations, customer support and other services personnel at our headquarters location allowing them to quickly address any questions that might arise during the sales process. |
| • | Continue to drive growth through referrals networks.We pay customers and others for referring additional customers. We will continue to expand these programs through the call center, post-install in-home parties, user-friendly software, and digital marketing. |
| • | Identify attractive financing options for customers.We refer our customers to a variety of options for financing their solar energy systems including home improvement loans, equipment leases and power purchase agreements. |
| • | Utilize technology to enhance and streamline our operations. We launched RGS 365™, a mobile software and online dashboard suite, creating what we believe is a better and more engaging customer experience. |
Our Competitive Strengths We believe being awarded the exclusive worldwide POWERHOUSE™ License will give us a competitive advantage because we expect to become a technology company insulated by patents creating a barrier to competition, as well as a company selling a product with brand recognition. Historically, we believe our customers select us because: | • | We have been in the solar industry for over 40 years. |
| • | Flexible menu of product financing options.Our customers can utilize cash, loans, and third-party ownership agreements, such as leasing and power purchase agreements, to acquire our products. |
| • | Location.We are located in states where utility costs are high and/or incentives for solar energy systems are available,therefore offering an attractive alternative to conventional power sources. |
Description of our Product and Services We had two operating divisions as of the end of 2018: (i) POWERHOUSE™ and (ii) Solar Division.
POWERHOUSE™: On September 29, 2017, we executed the License with Dow, to commercialize POWERHOUSE™ 3.0. Under the terms of the License, we have exclusive world-wide rights through 2034, the expiration of Dow’s applicable patents. The License requires that we obtain UL certification to commercialize and sell a minimum of 50 megawatts of solar within 5-years after obtaining UL certification to retain exclusive world-wide rights, a requirement we believe is achievable. We obtained UL certification on November 2, 2018. We have entered into third-party manufacturing agreements with suppliers and have begun to market POWERHOUSE™ solar shingles to a network of new home builders and roofers. Solar Division: The Solar Division performs installations of residential and commercial solar systems in the continental United States (also referred to as “Mainland”) and in Hawaii, doing business as Sunetric. On March 27, 2019, our Board of Directors determined to exit our Mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with the goal of maximizing future shareholder value. We offer our turnkey solar energy systems providing design, engineering, financing, procurement, permitting, installing, grid interconnection, monitoring, and maintenance services. We install residential systems generally between 3 kilowatts (“kW”) and 10 kW, and commercial systems up to 500 kW in size, depending on the amount of time prior to which we will need to seek additional capital. Pending any useelectricity used by the customer and the size of their building. The size of the average solar energy system we installed during 2018 was approximately 8.7 kW. We maintain a service department to manage and assist with service and repairs, and to provide operations and maintenance service contracts for larger projects. We design and build solar energy systems to meet each customer’s individual needs and circumstances. We assess a customer’s annual power requirements and average electricity rates to size the solar system and engineer its interconnection to the grid. We assess the customer’s roof size, configuration, and composition to determine the optimum location for the solar photovoltaic modules. We factor in information about the customer’s electrical service territory, rate structures, budget, preferred financing method and aesthetic preferences. We also identify the relevant federal, state and local regulations, including building codes, which are important to the cost, operation and return on investment of the customer’s solar energy system, as well as relevant tax rates, benefits of net proceeds,metering, and various other factors. We assess this data using solar production tools and analytical models to size and configure a cost-effective solar system for the customer and one that offers a return on investment to the customer that meets their requirements.
We prepare construction plans to obtain a building permit, which is necessary for grid interconnection and state incentive rebate processing. We also provide customers with a return-on-investment analysis which reflects the rebates and performance-based incentives that are available to each customer. Once all necessary approvals from financing partners and utilities, and incentive, rebate and jurisdictional authorities have been received, our in-house construction teams or authorized integrators begin the installation of the customer’s solar energy system. Once the solar energy system has been installed, we arrange for a final inspection by the local building department or other relevant regulatory agency and complete final as-built drawings of the system to submit applicable applications for the jurisdictional rebate(s). At the same time, we apply to the local utility company to finalize interconnection of the customer’s solar energy system to the utility grid.
Solar Energy Systems
The most visible component of solar energy systems are the solar shingles or photovoltaic modules with metal racking which transforms the sunlight into direct electrical current (“DC”), which then travels to the inverter. The inverter converts the DC electricity into useable alternating current that matches the current of the household electrical service and the utility grid. Other major components include the monitoring system which tracks the solar production of the system, and balance of system which includes mechanical and electrical parts. The electricity created can go onto the grid or be used by the customer to power household items such as lights and appliances. For customers who would like to have electrical black out protection or who want to strategically manage their electrical usage, we provide battery solutions that integrate with our solar energy systems. POWERHOUSE™: Our product is a built-in photovoltaic array (“BIPV”), also known as a solar shingle. The solar shingle is a building material that once installed becomes the roof structure. The BIPV is the equivalent of the photovoltaic module and racking of a traditional solar energy installation. We do not install these systems. Instead, we manufacture the solar shingle for distribution to our targeted customers. Solar Division: The Solar Division sells and installs traditional modules and racking photovoltaic solar energy systems. We do not manufacture any of these components. We purchase all components from the manufacturer or their distributors. Warranty Terms
POWERHOUSE™: We issue a manufacturer’s warranty on POWERHOUSE™ solar shingles, equal to the third-party manufacturer terms we secure. Workmanship warranty will be provided by the installer. Our new home builder and roofer network, when applicable, will submit to us a return merchandise authorization (“RMA”) for defective components. We will authorize the RMA and transfer substitute POWERHOUSE™ component(s) to the customer who will return a like number of defective components. We will similarly execute a RMA with the appropriate manufacturer. Solar Division: We and our suppliers offer warranties of up to 10 years for parts and labor, including property damage arising from workmanship, excluding roof penetrations which are generally warrantied for a period of 5 years. All major components installed in a photovoltaic system array are covered under transferable manufacturers’ warranties, which generally range from 10 to 25 years. Customer claims are processed through our customer service department. We will provide reasonable assistance to our customers in contacting the manufacturer concerning warranty service and undertake reasonable effort to recoup our labor costs from the manufacturer.
Financing We make available to our POWERHOUSE™ local roofing company customers a business-to-business lender to finance their purchases from us. We offer our Solar Division customers a choice to finance their solar systems with their cash, third-party loans, or third-party leases or power purchase agreements. We are constantly vetting new financing products and only refer the ones that fit the customer’s needs and desires. Our menu of finance offerings allows us to provide solar energy systems to our customers with financing terms that we believe are economically attractive for their individual situation. Sales and Marketing Our targeted customers for our POWERHOUSE™ in-roof solar shingle include (i) homeowners, (ii) local roofing companies, (iii) solar installation companies, (iv) custom homebuilders and (v) mass market homebuilders. We utilize our call center to contact customers in our geographic markets. We offer additional services, such as marketing support, referrals and on-site training to roofing companies that complete our requirements for becoming a POWERHOUSE™ Professional. We have and plan to continue to make marketing expenditures to develop brand name recognition for POWERHOUSE™. Our marketing has to-date included digital marketing, attendance at trade shows and expos, and we have arranged for television presentations. In the Solar Division, we have trained our residential and commercial sales organization to effectively engage prospective customers from initial interest to customized proposals to signed contracts. As previously disclosed, we are exiting our Mainland residential solar business. We intend to investcontinue to educate consumers about the benefits of our solar products in order to lower our customer acquisition costs and further expand the market opportunity. | • | Inside sales– Our inside sales groups initially engage with potential customers prior to our outside sales or e-sales teams’ customer engagement. Inside sales groups identify each potential customer’s initial interest in solar energy and compile data necessary to assess potential cost savings for subsequent discussion with the potential customer by the sales teams. |
| • | Direct outside sales– We employ an outside commercial sales force in the east coast markets and Hawaii to generate new business and complete sales orders. Effective March 1, 2018, we completed a realignment of our sales teams resulting in the elimination of our east coast residential sales force. |
| • | Customer referrals – Our customer referral program is designed to be an effective and efficient method of reaching new customers. Our program provides cash incentives to current customers to refer friends, relatives and co-workers. |
| • | Online Digital Marketing– Consumers seek online education, purchase options, and business reviews before determining the best provider to meet their needs. To align our business with marketplace, and our sales teams with the consumer, we continue to expand our online market presence. |
Customers POWERHOUSE™: Our customers will include homeowners, new homebuilders, engineering, procurement and construction (“EPC”) solar companies and roofers in the re-roof market. We estimate there are approximately 7 million re-roofs and new home construction annually in the United States. Solar Division: Our residential customers are homeowners interested in reducing electrical utility costs and switching to clean, renewable energy. Our residential solar energy systems are generally rooftop installations up to 24kW in size. Our commercial customers come from a variety of industries including retail, manufacturing, service, not-for-profit and municipal services. Oftentimes, our small commercial clients arise from the relationship developed when we install a residential solar system to the owner of the small business. Our commercial solar energy systems may be roof mounted or ground mounted and are generally up to 500kW in size. Occasionally, through the course of our normal operations, we are presented with opportunities for larger (greater than 500kW) commercial solar energy systems. We evaluate each of these large opportunities on a case by case basis while minimizing onerous contract terms. Suppliers POWERHOUSE™: We engage third-party manufacturers to manufacture components of the in-roof POWERHOUSE™ solar shingle. The major components of the POWERHOUSE™ solar shingle consist of the solar laminate, connectors, wire harnesses, base assembly and integrated flashing system. The solar laminate, connectors and wire harnesses are produced by a manufacturer located in China and shipped to our U.S. based manufacturer of the baseplate for assembly into a solar shingle. The solar shingle is then shipped to our third-party logistics provider to warehouse and distribute kitted systems to our customers. Solar Division: Our solar energy systems utilize photovoltaic modules and inverters purchased from several manufacturers and distributors. The majority of these materials are “Buy American” under the American Recovery and Reinvestment Act of 2009. We negotiate pricing based on quantity purchased and payment terms. Generally, we purchase major components as needed and do not have long-term or volume commitments with suppliers. Competition POWERHOUSE™: Dow developed the POWERHOUSE™ solar shingle and holds various related worldwide patents. Since we obtained the exclusive License to commercialize the product worldwide from Dow, the patents and licenses provide a barrier to entry, thereby limiting the number of competitors. Existing sources of competition include Tesla, Inc., Suntegra and CertainTeed, whom we compete with on market penetration, price and aesthetics. We believe we compete favorably with these companies.
Solar Division: We believe our primary competitors are the traditional local utilities that supply energy to our potential customers. We compete with these traditional utilities primarily based on price, predictability of price and the ease by which customers can switch to electricity generated by our solar energy systems rather than fossil-based alternatives. We believe that our pricing and focus on customer relationships allow us to compete favorably with traditional utilities in the regions we service. Other sources of competition are other solar energy system providers such as Tesla, Inc., Vivint Solar Inc., Sunrun Inc., Sungevity, Inc., and many others. These companies may offer products that are similar to our solar energy systems, and we primarily compete with these companies based on price. We believe that we compete favorably with these companies. Regulations POWERHOUSE™: We will have to maintain compliance with UL standards on POWERHOUSE™ 3.0 solar shingles and on any future new product development. Solar Division: An interconnection agreement is generally required from the applicable local electricity utility to interconnect a solar energy system with the utility grid. In almost all cases, interconnection agreements are standard form agreements that have been pre-approved by the local public utility commission or other regulatory body with jurisdiction over interconnection. As such, no additional regulatory approvals are required once interconnection agreements are signed. We prepare and submit these agreements on behalf of our customers to ensure compliance with interconnection rules. Our operations are subject to stringent and complex federal, state and local laws and regulations governing the occupational health and safety of our employees and wage regulations. For example, we are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or “OSHA”, and comparable state laws that protect and regulate employee health and safety. We expend resources to comply with OSHA requirements and industry best practices. Federal and/or state prevailing wage requirements, which generally apply to any “public works” construction project that receives public funds, may apply to installations of our solar energy systems on government facilities. The prevailing wage is the basic hourly rate paid on public works projects to a majority of workers engaged in a particular craft, classification or type of work within a particular area. Prevailing wage requirements are established and enforced by regulatory agencies. Our in-house personnel monitor and coordinate our continuing compliance with these regulations when required. Some jurisdictions place limits on the size or number of solar energy systems that can be interconnected to the utility grid. This can limit our ability to sell and install solar energy systems in some markets. The regulatory environment is constantly changing. Government Incentives and Policies U.S. federal, state and local governments have established various policies, incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives include tax credits, cash grants, production-based incentives, tax abatements and rebates. These incentives help catalyze private sector investments in solar energy, energy efficiency and energy storage measures, including the installation and operation of residential and commercial solar energy systems. Following the extension of the Solar Investment Tax Credit in December 2015, the Internal Revenue Code allows a United States taxpayer to claim a tax credit of 30% of qualified expenditures for a solar energy system that is placed in service on or before December 31, 2019. This credit is scheduled to decline to 26% effective January 1, 2020, 22% in 2021, and then to 10% for commercial projects and 0% for residential projects in 2022. Many U.S. states and local jurisdictions have established property tax incentives for renewable energy systems, which include exemptions, exclusions, abatements and credits. Many state governments, investor-owned utilities, municipal utilities and co-operative utilities offer rebates or other cash incentives for the installation and operation of a solar energy system or energy-related products. Many states have a regulatory policy known as net energy metering, or net metering. Net metering typically allows our customers to interconnect their on-site solar energy systems to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar energy system that is exported to the grid in excess of electric load used by customers. Some states have established limits on net metering, fees on solar energy systems, or reduced the credit available for electricity generated by solar energy systems that are connected to the utility grid. For example, Hawaii, Nevada and Mississippi have announced net metering policies that establish wholesale rates, not retail rates, for crediting electricity produced by solar energy systems. This has adversely impacted the attractiveness of solar energy to residential customers in these markets. The California Public Utilities Commission issued a ruling that maintains the net proceedsenergy metering credit at full retail value but adds new charges and requirements for customers installing a solar energy system. On the other hand, other states continue to expand their net metering programs. New York, for example, has suspended its cap on solar photovoltaic systems covered by the state’s net metering program. Some states like Massachusetts have offered Solar Renewable Energy Credits (“SRECs”) that provide cash payments based on the electricity produced by solar energy systems as an incentive for customers to invest in investment-grade, short-term interest-bearing securities.these systems. These programs are generally capped and must be reauthorized or extended when the cap is reached in order for the incentives to be continued. The Massachusetts Department of Energy Resources announced that the total capacity available under its most recent SREC program (SREC-II) for projects over 25 kW had been exceeded in early 2016, however it was announced on January 31, 2017 by the Massachusetts Department of Energy Resources that their new program, called Solar Massachusetts Renewable Target (“SMART”), is targeted to start in April 2018 and that the SREC II program would be extended in order to bridge between the two programs. The SREC II program was ultimately extended until November 26, 2018, at which point the first applications for SMART were accepted. The first SMART incentive allocations began January 15, 2019. On January 22, 2018, the Office of the President of the United States approved in substantial form, recommendations by the U.S. International Trade Commission to impose a tariff of 30% on imports of solar cells and photovoltaic modules under Section 201 of the Trade Act of 1974, unless specifically excluded. The 30% tariff declines 5% per year over the four-year term of the tariff. Further, the provisions of the 201 Tariff are applicable to imported solar cells and modules from Canada, despite its being a member of the North American Free Trade Act. 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 systems, with the fourth and first quarters of the year seeing less sales orders than the second and third quarters. As previously disclosed, we are exiting our Mainland residential solar business. As we have just begun to market POWERHOUSE™ in-roof shingles, we do not have historical experience to assess seasonality for this line of business. Employees As of April 29, 2019, we had approximately 60 total and full-time employees. None of our employees are represented by a labor union or subject to a collective bargaining agreement. Offerings On January 4, 2018, we closed the January 2018 Offering. On April 9, 2018, we closed the April 2018 Offering. On April 2, 2019, we closed the April 2019 Offering. DESCRIPTION OF PROPERTY Our principal executive offices are located in Denver, Colorado. The following table sets forth certain information relating to our primary facilities: | Primary Locations | | Size (sq. ft.) | | | Use | | Lease Expiration | | Business Segment | | Denver, CO | | | 12,477 | | | Corporate Headquarters | | May-22 | | All | | Bloomfield, CT | | | 10,000 | | | Office and warehouse | | Nov-19 | | Solar Division | | Kailua, HI | | | 10,000 | | | Office and warehouse | | Dec-19 | | Solar Division |
Existing facilities have lease renewal options ranging from 1 month to 5 years. LEGAL PROCEEDINGS From time to time, we are involved in legal proceedings that we consider to be in the normal course of business. MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market Information and Holders Effective February 15, 2019, our Common Stock was quoted on the OTCQX under the symbol “RGSE.” Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. Prior to such date, our Common Stock traded on the Nasdaq Capital Market under the same symbol. On May 1, 2019, we had 87 shareholders of record and 109,639,125 shares of $.0001 par value Common Stock and zero shares of $.0001 par value Class B common stock outstanding. Dividend policyPolicy We have not declared or paid any cash dividends on our Class A common stock,Common Stock, and we do not anticipate doing so in the foreseeable future. We currently intend to retain future earnings, if any, to operate our business and support our future growth strategies. Any future determination to pay dividends on our Class A common stockCommon Stock will be at the discretion of our boardBoard of directorsDirectors and will depend on our financial condition, results of operations, contractual restrictions, restrictions imposed by applicable law, capital requirements and other factors that our boardBoard of directorsDirectors deems relevant. Equity Compensation Plan Information Capitalization
The following table sets forthsummarizes equity compensation plan information for our capitalizationCommon Stock as of December 31, 2007 on an actual basis, on a pro forma basis to give effect to our new corporate structure and the Carlson Solar acquisition as if those events had occurred on December 31, 2007, and on a pro forma basis as adjusted to give effect to our sale of shares of Class A common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the range indicated on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds from this offering as described under “Use of Proceeds.” You should read the information in this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.2018:
| | | Number of securities
to be issued upon
exercise of
outstanding options | | | Weighted average
exercise price of
outstanding options | | | Number of securities
remaining available
for future issuance
under equity
compensation plans | | | Equity compensation plans approved by security holders | | | 1,206,645 | | | $ | 3.22 | | | | 93,500 | |
| | | | | | | | | | | | | | | | As of December 31, 2007 | | | (in thousands, except share and per share data) | | Actual(1) | | | Pro Forma(1) | | | Pro Forma
As Adjusted(2) | | | | | | | | (unaudited) | | Cash and cash equivalents | | $ | 542 | | | $ | 542 | | | $ | | | | | | | | | | | | | | | | Deferred tax assets | | | 2,478 | | | | 2,478 | | | | — | (3) | Deferred tax liabilities | | | — | | | | — | | | | 279 | (3) | | | | | Payable to Gaiam | | | 16,286 | | | | 19,822 | | | | — | | | | | | Shareholders’ equity: | | | | | | | | | | | | | Preferred stock, par value $.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding, actual, pro forma, and pro forma as adjusted | | | — | | | | — | | | | — | | Class A common stock, par value $.0001 per share; 150,000,000 shares authorized, no shares issued and outstanding, actual and pro forma; and shares issued and outstanding pro forma as adjusted | | | — | | | | — | | | | | | Class B common stock, $.0001 par value per share; 50,000,000 shares authorized; no shares issued and outstanding, actual; 10,000,000 shares issued and outstanding, pro forma and pro forma as adjusted(1) | | | — | | | | 1 | | | | 1 | | Additional paid-in capital | | | 2,150 | | | | 2,149 | | | | | | Accumulated deficit | | | (500 | ) | | | (500 | ) | | | (500 | ) | | | | | | | | | | | | | | Total shareholders’ equity | | | 1,650 | | | | 1,650 | | | | | | | | | | | | | | | | | | | Total capitalization | | $ | 17,936 | | | $ | 21,472 | | | $ | | | | | | | | | | | | | | | |
(1)
| The Actual column as of December 31, 2007 reflects our acquisition of Marin Solar. The Pro Forma column as of December 31, 2007 reflects our consolidated balance sheet giving pro forma effect to our new corporate structure and the acquisition of Carlson Solar as if those events had occurred on December 31, 2007. Our new corporate structure reflects the contribution by Gaiam to us of our business assets and operations in exchange for the issuance of 10,000,000 shares of our Class B common stock. See “Unaudited Pro Forma Consolidated Financial Information” for further information regarding the pro forma adjustments.
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(2)
| A $1.00 increase (decrease) in the assumed public offering price of $ per share would increase (decrease) each of cash and cash equivalents, total shareholders’ equity and total capitalization by $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us and after giving effect to our receipt of the estimated net proceeds.
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(3)
| After the date we cease to be a member of Gaiam’s consolidated group for federal income tax purposes, to the extent we become entitled to utilize loss carryforwards from our separate tax returns, we will distribute to Gaiam the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. Accordingly, we expect to recognize a valuation allowance against certain of our deferred tax assets resulting in a net deferred tax liability upon completion of this offering.
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Dilution
If you invest in our Class A common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value of our Class A common stock immediately after the completion of this offering. Dilution results from the fact that the per share offering price of our Class A common stock is substantially in excess of the pro forma net tangible book value per share. Pro forma net tangible book value represents our pro forma net book equity excluding intangible assets. Our pro forma net book equity is derived from our unaudited consolidated pro forma balance sheet, which gives effect to our new corporate structure and the acquisition of Carlson Solar as if those events had occurred on December 31, 2007. Our pro forma net tangible book value at December 31, 2007 was approximately $(6.8) million, or $(0.68) per share. Pro forma net tangible book value per share before this offering has been determined by dividing pro forma net tangible book value (total book value of tangible assets less total liabilities) by the pro forma number of shares of common stock outstanding at December 31, 2007.
After giving effect to the sale of our Class A common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting (a) underwriting discounts and commissions and estimated offering expenses payable by us, (b) the use of the estimated net proceeds as described under “Use of Proceeds,” and (c) the effects on our deferred tax assets and liabilities as a result of our tax sharing agreement with Gaiam, our pro forma as adjusted net tangible book value at December 31, 2007 would have been $ million or $ per share. This represents an immediate increase in pro forma net tangible book value per share of $ to our existing shareholder and immediate dilution in pro forma net tangible book value per share of $ to new investors who purchase Class A common stock in this offering. The following table illustrates this pro forma as adjusted per share dilution to new investors, assuming the underwriters do not exercise their over-allotment option:
| | | | | | | | | | | Assumed initial public offering price per share | | | | | | $ | | Pro forma net tangible book value per share at December 31, 2007, before giving effect to this offering | | $ | (0.68 | ) | | | | Increase in pro forma net tangible book value per share attributable to investors purchasing Class A common stock in this offering | | | | | | | | | | | | | | | | Pro forma as adjusted net tangible book value per share after giving effect to this offering | | | | | | | | | | | | | | | | Pro forma as adjusted dilution per share to new investors | | | | | | $ | | | | | | | | | |
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) our pro forma as adjusted net tangible book value by approximately $ million, or approximately $ per share, and the pro forma as adjusted dilution per share to investors in this offering by approximately $ , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the use of the estimated net proceeds as described under “Use of Proceeds.”
We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted net tangible book value by approximately $ million, or $ per share, and the pro forma as adjusted dilution per share to investors in this offering would be $ , assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the use of the estimated net proceeds as described under “Use of Proceeds.”
Dilution
If the underwriters exercise their option in full to purchase additional shares of Class A common stock in this offering, the pro forma as adjusted net tangible book value per share after this offering would be $ per share, the increase in the pro forma as adjusted net tangible book value per share to the existing shareholder would be $ per share, and the pro forma as adjusted dilution to new investors in this offering would be $ per share.
The following table sets forth, on the pro forma as adjusted basis described above, at December 31, 2007, the difference between the number of shares of common stock purchased, the total consideration paid, and the average price per share paid by the existing shareholder and by investors purchasing shares in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.
| | | | | | | | | | | | | | | | | Shares Purchased | | | Total Consideration | | | Average Price
Per Share | | | | Number | | Percent | | | Amount | | Percent | | | Existing shareholder | | | | | | | | | | | | $ | | | | | | | | | | | | | | | | New investors | | | | | | | | | | | | $ | | | | | | | | | | | | | | | | Total | | | | 100 | % | | | | 100 | % | | $ | | | | | | | | | | | | | | | |
The discussions and tables above are based on shares of our Class A common stock and 10,000,000 shares of our Class B common stock outstanding as of December 31, 2007, and excludes the following:
| | Ø43 | | 370,000 shares of Class A common stock issuable upon exercise of all outstanding options granted or assumed by us and warrants issued in connection with the acquisitions of Marin Solar and Carlson Solar at a combined weighted-average exercise price of $3.20 per share and
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| Ø | | 700,000 shares of Class A common stock reserved for future grant or issuance under the Incentive Plan, subject to adjustment as provided in such plan.
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Effective upon the completion of this offering, an aggregate of up to 700,000 shares of our Class A common stock will be reserved for future issuance under the Incentive Plan, subject to increase in accordance with the terms of the Incentive Plan. To the extent that new options are issued under the Incentive Plan or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our shareholders.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unaudited pro forma consolidated financial information
The unaudited pro forma consolidated balance sheet as of December 31, 2007 reflects our consolidated balance sheet giving pro forma effect to our new corporate structure as well as the acquisition of Carlson Solar as if those events had occurred on December 31, 2007. Our new corporate structure reflects the contribution to us by Gaiam of our business assets and operations in exchange for 10,000,000 shares of our Class B common stock. The Marin Solar acquisition is included in our historical balance sheet as of December 31, 2007.
The unaudited pro forma consolidated statement of operations for the year ended December 31, 2007 presents our consolidated results of operations giving pro forma effect to the acquisitions of Marin Solar and Carlson Solar as if such transactions had occurred on January 1, 2007. Our historical statement of operations includes Marin Solar’s results of operations for November and December 2007.
Our audited and unaudited pro forma consolidated financial statements include allocations of certain Gaiam expenses, including costs of fulfillment, customer service, financial and other administrative services, and income taxes. The expense allocations are based on what we and Gaiam considered to be reasonable reflections of the utilization of services provided or the benefits received by us. The historical financial information in our audited and unaudited pro forma consolidated financial statements may not be indicative of what our results of operations, financial position, changes in equity and cash flows will be in the future, or what they would have been had we been a separate stand-alone entity during the periods presented.
The pro forma adjustments are based on currently available information and upon assumptions that we believe are reasonable in order to reflect, on a pro forma basis, the impact of these transactions, on our historical financial information. Obtaining additional information necessary to calculate the actual purchase price of the Marin Solar and Carlson Solar acquisitions is subject to final purchase price adjustments as provided for in their respective purchase agreements and to final purchase price allocations. The actual adjustments, therefore, may differ from the pro forma adjustments.
Our unaudited consolidated pro forma financial information should be read together with “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes included elsewhere in this prospectus.
The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial position that would have occurred had we operated as a public company, rather than as a wholly owned subsidiary of Gaiam, during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial condition had the Marin and Carlson acquisitions occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project the results of operations or financial position for any future period or date.
Unaudited pro forma consolidated financial information
Unaudited Pro Forma Consolidated Balance Sheet
| | | | | | | | | | | | | | | | | | | | | As of December 31, 2007 | | | (in thousands) | | Real Goods | | | Carlson
Solar | | Pro Forma
Adjustments | | | Notes | | Pro Forma | | | ASSETS | | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 542 | | | $ | — | | $ | — | | | | �� | $ | 542 | | Accounts receivable, net | | | 3,632 | | | | 336 | | | — | | | | | | 3,968 | | Inventory, less allowances | | | 2,454 | | | | 1,262 | | | — | | | | | | 3,716 | | Deferred costs on uncompleted contracts | | | 992 | | | | 193 | | | — | | | | | | 1,185 | | Deferred advertising costs | | | 277 | | | | — | | | — | | | | | | 277 | | Deferred tax assets | | | 154 | | | | — | | | — | | | | | | 154 | | Other current assets | | | 19 | | | | 1 | | | — | | | | | | 20 | | | | | | | | | | | | | | | | | | | | Total current assets | | | 8,070 | | | | 1,792 | | | — | | | | | | 9,862 | | Property and equipment, net | | | 4,382 | | | | 199 | | | — | | | | | | 4,581 | | Goodwill and other intangibles, net | | | 6,094 | | | | 2,393 | | | — | | | | | | 8,487 | | Deferred tax assets | | | 2,324 | | | | — | | | — | | | | | | 2,324 | | Other assets | | | 116 | | | | 1 | | | — | | | | | | 117 | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 20,986 | | | $ | 4,385 | | $ | — | | | | | $ | 25,371 | | | | | | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | | Accounts payable | | $ | 1,275 | | | $ | 10 | | $ | — | | | | | $ | 1,285 | | Accrued liabilities | | | 421 | | | | 217 | | | — | | | | | | 638 | | Deferred revenue on uncompleted contracts | | | 1,354 | | | | 251 | | | — | | | | | | 1,605 | | Payable to Gaiam | | | 16,286 | | | | 3,536 | | | — | | | | | | 19,822 | | | | | | | | | | | | | | | | | | | | Total liabilities | | | 19,336 | | | | 4,014 | | | — | | | | | | 23,350 | | | | | | | | | | | | | | | | | | | | Commitments and contingencies | | | | | | | | | | | | | | | | | | Minority interest | | | — | | | | 371 | | | — | | | | | | 371 | | 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; no shares issued and outstanding | | | — | | | | — | | | — | | | | | | — | | Class B common stock, par value $0.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding, actual; 10,000,000 shares issued and outstanding, pro forma as adjusted | | | — | | | | — | | | 1 | (a) | | | | | 1 | | Additional paid-in capital | | | 2,150 | | | | — | | | (1 | )(a) | | | | | 2,149 | | Accumulated deficit | | | (500 | ) | | | — | | | — | | | | | | (500 | ) | | | | | | | | | | | | | | | | | | | Total shareholders’ equity | | | 1,650 | | | | — | | | — | | | | | | 1,650 | | | | | | | | | | | | | | | | | | | | Total liabilities and shareholders’ equity | | $ | 20,986 | | | $ | 4,385 | | $ | — | | | | | $ | 25,371 | | | | | | | | | | | | | | | | | | | |
(a)
| To reflect our new corporate structure under which Gaiam contributed to us our business assets and operations in exchange for 10,000,000 shares of our Class B common stock.
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Unaudited pro forma consolidated financial information
Unaudited Pro Forma Consolidated Statement of Operations
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2007 | | | (in thousands, except per share data) | | Real
Goods | | Marin &
Carlson | | | Pro Forma
Adjustments | | | Notes | | Pro Forma
As Adjusted | | Net revenue | | $ | 18,922 | | $ | 13,823 | | | $ | — | | | | | $ | 32,745 | | Cost of goods sold | | | 12,426 | | | 10,509 | | | | — | | | | | | 22,935 | | | | | | | | | | | | | | | | | | | | Gross profit | | | 6,496 | | | 3,314 | | | | — | | | | | | 9,810 | | | | | | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | | | | | | Selling and operating | | | 5,728 | | | 2,188 | | | | — | | | | | | 7,916 | | General and administrative | | | 582 | | | 203 | | | | 120 | (a) | | | | | 905 | | | | | | | | | | | | | | | | | | | | Total expenses | | | 6,310 | | | 2,391 | | | | 120 | | | | | | 8,821 | | | | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from operations | | | 186 | | | 923 | | | | (120 | ) | | | | | 989 | | | | | | | | Other expense | | | — | | | 32 | | | | — | | | | | | 32 | | | | | | | | | | | | | | | | | | | | | | | | | | Income (loss) before income taxes and minority interest | | | 186 | | | 891 | | | | (120 | ) | | | | | 957 | | | | | | | | Income tax expense (benefit) | | | 84 | | | 352 | | | | (47 | )(a) | | | | | 389 | | Minority interest in net income of consolidated subsidiary, net of income taxes | | | — | | | (77 | ) | | | — | | | | | | (77 | ) | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | 102 | | $ | 462 | | | $ | (73 | ) | | | | $ | 491 | | | | | | | | | | | | | | | | | | | | Net income per share: | | | | | | | | | | | | | | | | | | Basic and diluted | | $ | 0.01 | | | | | | | | | | | | $ | 0.05 | | | | | | | | | | | | | | | | | | | | Weight average shares outstanding: | | | | | | | | | | | | | | | | | | Basic and diluted | | | 10,000 | | | | | | | | | | | | | 10,000 | | | | | | | | | | | | | | | | | | | |
(a)
| To reflect amortization of marketing-related intangibles with three-year lives recognized as a result of the purchase price allocations for Marin Solar and Carlson Solar and the related tax impact.
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Selected consolidated financial data
You should read the following selected consolidated financial data together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We derived the consolidated statements of operations data for each of the years ended December 31, 2005, 2006, and 2007 and the consolidated balance sheet data as of December 31, 2006 and 2007 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statement of operations data for each of the years ended December 31, 2003 and 2004 and the consolidated balance sheet data as of December 31, 2003, 2004, and 2005 from our unaudited financial statements, which are not included in this prospectus. The consolidated financial data for 2007 includes the effects of the Marin Solar acquisition from the November 2007 date of the transaction.
Our audited and unaudited consolidated financial statements include allocations of certain Gaiam expenses, including costs of fulfillment, customer service, financial and other administrative services, and income taxes. The expense allocations are based on what we and Gaiam considered to be reasonable reflections of the utilization of services provided or the benefits received by us. Income tax expenses were calculated on the separate return approach. The historical financial data in our audited and unaudited consolidated financial statements may not be indicative of what our results of operations, financial position, changes in equity and cash flows will be in the future, or what they would have been had we been a separate stand-alone entity during the periods presented.
| | | | | | | | | | | | | | | | | | | Years ended December 31, | | (in thousands, except per share data) | | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | | | (unaudited) | | | | | | | Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | Net revenue | | $ | 9,008 | | $ | 9,268 | | $ | 12,114 | | $ | 16,812 | | $ | 18,922 | Cost of goods sold | | | 5,793 | | | 5,730 | | | 7,763 | | | 10,862 | | | 12,426 | | | | | | | | | | | | | | | | | Gross profit | | | 3,215 | | | 3,538 | | | 4,351 | | | 5,950 | | | 6,496 | | | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | | | | Selling and operating | | | 2,427 | | | 2,987 | | | 3,464 | | | 4,964 | | | 5,728 | General and administrative | | | 452 | | | 480 | | | 492 | | | 567 | | | 582 | | | | | | | | | | | | | | | | | Total expenses | | | 2,879 | | | 3,467 | | | 3,956 | | | 5,531 | | | 6,310 | | | | | | | | | | | | | | | | | Income before income taxes | | | 336 | | | 71 | | | 395 | | | 419 | | | 186 | Income tax expense | | | 137 | | | 30 | | | 159 | | | 169 | | | 84 | | | | | | | | | | | | | | | | | Net income | | $ | 199 | | $ | 41 | | $ | 236 | | $ | 250 | | $ | 102 | | | | | | | | | | | | | | | | | Net income per share(1): | | | | | | | | | | | | | | | | Basic and diluted | | $ | 0.02 | | $ | 0.00 | | $ | 0.02 | | $ | 0.03 | | $ | 0.01 | | | | | | | | | | | | | | | | | Weighted average shares outstanding(1): | | | | | | | | | | | | | | | | Basic and diluted | | | 10,000 | | | 10,000 | | | 10,000 | | | 10,000 | | | 10,000 | | | | | | | | | | | | | | | | |
(1)
| Net income per share is calculated as if Gaiam transferred our business assets and operations to us in return for 10,000,000 shares of our Class B common stock on January 1, 2003. We did not exist as a separate company during the historical periods presented. We computed earnings per share based on the shares outstanding following this contribution as if such shares were outstanding from the beginning of the periods presented.
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Selected consolidated financial data
| | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | (in thousands) | | 2003 | | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | | | (unaudited) | | | (unaudited) | | | (unaudited) | | | | | | | | Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 172 | | | $ | 115 | | | $ | 214 | | | $ | 248 | | | $ | 542 | | Working capital (deficit) | | | (9,465 | ) | | | (9,332 | ) | | | (8,871 | ) | | | (8,126 | ) | | | (11,266 | ) | Total assets | | | 12,724 | | | | 12,369 | | | | 13,643 | | | | 16,041 | | | | 20,986 | | Payable to Gaiam | | | 11,561 | | | | 11,075 | | | | 11,794 | | | | 13,919 | | | | 16,286 | | Total liabilities | | | 11,702 | | | | 11,307 | | | | 12,345 | | | | 14,493 | | | | 19,336 | | Total shareholders’ equity | | | 1,022 | | | | 1,062 | | | | 1,298 | | | | 1,548 | | | | 1,650 | |
Management’s discussion and analysis of financial
condition and results of operations
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes. This discussion and analysis containscontain 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 this prospectus. Overview
We areOverview
For the last 40 years, we have been a leading residential and small business commercial solar energy integrator, ranking number one in California, which currently represents approximately two-thirds of the total U.S. market for grid-connected solar energy systems.EPC company. We offer turnkey services, to our customers, including the design, procurement, installation,permitting, build-out, grid connection, monitoring, maintenance and referrals for third party financing of solar energy systems. We have 30 years of experience in residential solar energy, beginning with our sale in 1978 of the first solar photovoltaic, or PV, panels in the United States. We believe that we have installed more residential solar energy systems in the United States than any other company, including more than 2,400 residential and small commercial solar energy systems. In addition, we have sold a variety of solar products to more than 30,000 customers since our founding. Our focused customer acquisition approach enables us to have what we believe is the lowest customer acquisition costs in the industry. We believe that our Real Goods brand has a national reputation for the highest quality customer service in the solar energy market, which leads to a significant number of word-of-mouth referrals and new customers. In addition, our parent company, Gaiam, is a leader in the sustainablewarranty and renewable energy lifestyle market and has a base of over 8 million direct customers, providing us additional lead generation for potential solar energy customers. We also cross-market other renewable energy lifestyle products and services, in addition to solar energy systems, to our “community of customers.”
customer satisfaction activities. Our solar energy systems use the highest qualityhigh-quality solar PV modules from industry-leading manufacturers, including Sharp, SunPower and Kyocera 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 emissions output and reliance upon fossil fuel energy sources. As a 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. During 2018, we received UL certification for POWERHOUSE™ 3.0 and manufactured our initial solar shingles during December 2018. We offer a full selectionanticipate that in the future, the majority of renewable energy productsour revenue will arise from sales of POWERHOUSE™ in-roof solar shingles to local roofing companies, solar installers and sustainable living resources throughhomebuilders. We, including our nationally distributed catalog and website. Our Solar Living Centerpredecessors, have more than 40 years of experience in Hopland features interactive demonstrations for renewableresidential solar energy and environmentally sensible technologiestrace our roots to 1978, when Real Goods Trading Corporation sold the first solar photovoltaic panels in the United States. We have designed and isinstalled over 26,000 residential and commercial solar energy systems since our founding. We operate as three reportable segments: (1) Solar Division – the largest facilityinstallation of solar energy systems for homeowners, including lease financing thereof, and small business commercial in the United States; (2) POWERHOUSE™ - the manufacturing and sales of solar shingles; and (3) Other – corporate operations. On March 27, 2019, our Board of Directors determined to exit its kind,mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with approximately 2the goal of maximizing future shareholder value. We believe this structure and realignment enables us to effectively manage our operations and resources. As an EPC, 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. As a manufacturer of POWERHOUSE™, we will recognize revenue upon shipment of materials related to customer purchase order fulfillment. During 2018, we established a supply chain to manufacture POWERHOUSE™. We also began building a nationwide network of local roofers and solar installers. We received our first purchase order from a customer on December 27, 2018 and shipped to the customer in January 2019. POWERHOUSE™ License
A material significant event occurred on September 29, 2017, when we executed the License with Dow, providing us an exclusive domestic and international right to commercialize the 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 version was developed with traditional silicon solar cells to increase solar production and to provide a competitive consumer price point. In 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 the TLA allows us to market the POWERHOUSE™ 3.0 product using the Dow name. Under the terms of the License, we will produce, market and sell POWERHOUSE™ 3.0, for which we paid a license fee of $3 million visitors since it openedalong with a royalty fee equal to 2.5% against net sales of the POWERHOUSE™ product and services, payable quarterly in 1996.arrears. Further, we were responsible for all costs to obtain UL certification and we are responsible for the prosecution of all related patents world-wide, which may be offset against the payment of the royalty fee. During December 2018, we began commercialization of POWERHOUSE™ 3.0 entailing the manufacturing, marketing and sale of POWERHOUSE™ 3.0 to roofing companies. Mergers and Acquisitions
Marin Solar, Inc.
On November 1, 2007,As of December 31, 2018, we purchased 100% ownership of Marin Solar forhave invested approximately $3.2 million that has been capitalized to the POWERHOUSE™ License, an intangible asset on the Consolidated Balance Sheet.
Other Key Metrics
Backlog
Backlog is discussed below and an important metric as we implement our revenue growth strategy. Key Operational Metric, Gross Margin on Mainland Residential Operations, Currently Our Largest EPC Operating Unit 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 which is used by the Company to measure its performance in cash, plus direct acquisitionachieving 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. Our gross margin percentage on actual installations and with idle time decreased year over year in part due to a greater mix of small commercial projects in 2018 as compared to 2017, as these projects typically have lower margins than our residential installations. Additionally, a majority of indirect labor costs of approximately $0.2 million. The purchase agreement provides for additional consideration contingent uponare fixed, which lowers the gross margin % with idle time when there is a decline in revenue as we experienced in 2018 vs. 2017. | | | Twelve Months Ended | | | | | December 31, 2018 | | | December 31, 2017 | | | Gross margin percentage on actual installation time | | | 21 | % | | | 24 | % | | Gross margin percentage including idle time | | | 6 | % | | | 13 | % |
Backlog Backlog represents the dollar amount of revenue generatedthat may be recognized in the future from certain potential customerssigned contracts to install solar energy systems that have not yet been installed without taking into account possible future cancellations. Backlog is not a measure defined by generally accepted accounting principles 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 received and include anticipated revenues associated with (i) the collectionoriginal contract amounts, and (ii) change orders for which we have received written confirmations from customers. Backlog may not be indicative of certain rebates. As additional consideration we granted to the sellers warrants to purchase 40,000 shares offuture operating results, and projects in our Class A common stock.backlog may be cancelled, modified or otherwise altered by customers. Management’s discussionThe following table summarizes changes to our backlog for our Solar Division for the years ended December 31, 2018 and analysisDecember 31, 2017:
| (in thousands) | | Solar Division | | | Backlog at January 1, 2017 | | $ | 9,375 | | | Bookings from new awards (“Sales”) | | | 26,596 | | | Cancellations and reductions on existing contracts | | | (9,206 | ) | | Amounts recognized in revenue upon installation | | | (14,000 | ) | | Backlog at December 31, 2017 | | | 12,765 | | | Bookings from new awards (“Sales”) | | | 26,744 | | | Cancellations and reductions on existing contracts | | | (12,835 | ) | | Amounts recognized in revenue upon installation | | | (11,017 | ) | | Backlog at December 31, 2018 | | $ | 15,657 | |
We have experienced a high level of financialcontract cancellations, which we attribute to (i) the competitive nature of the solar industry wherein customers shop price after signing a contract and exercise their right to cancel during a three day rescission period after we countersign their contract, (ii) customer home’s physical condition requires upgrades that they may not be able to afford or reduces their return on investment, and results(iii) delays to installing their system within their desired timeframe which are often a result of prolonged periods of time to receive local utility approval for installations. We determined that for optimum internal operations, and customer satisfaction, that a backlog equivalent to a few months of sales is optimal. Revenue Growth Strategy Carlson Solar
Our plans to increase revenue include: | · | Manufacture, market and sell the POWERHOUSE™ 3.0 to roofing companies, solar installers and home builders; |
| · | Leverage the POWERHOUSE™ brand to generate leads and revenue for the Solar Division; |
| · | 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; |
| · | Expand our EPC operations to new states; and |
| · | Expand our network of authorized third-party installers. |
Recent Developments On January 1, 2008,March 27, 2019, our 88.4% owned subsidiary acquired certainBoard of Directors determined to exit our mainland residential solar business to focus on the assetsPOWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with the goal of Carlson Solar for $3.2 millionmaximizing future shareholder value. We believe this structure and realignment enables us to effectively manage our operations and resources. This realignment is expected to result in cash,the reduction of workforce payroll plus direct acquisition costsburden of approximately $0.2$4.0 million annually. Revenues and net loss in 2018 for the mainland residential solar business were approximately $8.9 million and assumed certain$6.3 million, respectively. In order for us to convert our existing backlog to revenue, we plan to use authorized integrators to complete installations throughout the remainder of Carlson Solar’s liabilities. As additional consideration, we granted to the sellers warrants to purchase 30,000 shares of our Class A common stock. The assets acquired were determined to have all inputs and processes necessary for the transferred assets to continue to conduct normal operations after acquisition; accordingly, the purchase price was treated as a business combination pursuant to SFAS No. 141,Business Combinations.2019. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP.“GAAP.” The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following to be critical accounting policies whose application have a material impact on our reported results of operations, and which involve a higher degree of complexity, as they require us to make judgments and estimates about matters that are inherently uncertain.
Revenue Recognition Effective January 1, 2018, we have adopted “Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 uncertainty of revenue and cash flows arising from contracts with customers. We have 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. Based on our review of contracts that were not substantially completed on December 31, 2017, there was no impact to the opening retained earnings balance.
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 satisfied our performance obligations to the customer and all revenue recognition criteria are met.
Revenue Recognition – Installation of photovoltaic modules (“PV”) solar systems We use standard contract templates to initiate sales with customers and determined that each project started during the year ended December 31, 2018 contains one performance obligation. Although the contract states multiple services which are capable of being distinct, they are considered a single integrated output to the customer which is customized for each customer. As such all the services promised within a contract are considered one performance obligation. We recognize revenue for installation of PV solar systems over time following the transfer of control to the customer which typically occurs as the PV solar system is being installed. If control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation. The method utilized by us to measure the progress towards completion requires judgment and is based on the products and services provided. We utilize the input method to measure the progress of our contracts because it best depicts the transfer of assets to the customer which incurs as materials are consumed by the project. The input method measures the progress towards completion based on the ratio of costs incurred to date (“actual cost”) to the total estimated costs (“budget”) at completion of performance obligation. Revenue, including estimated fees, are recorded proportionally as costs are incurred. Costs to fulfill include materials, labor and/or subcontractors’ costs, and other direct costs. Indirect costs and costs to procure the panels, inverters, and other system miscellaneous costs needed to satisfy the performance obligation are excluded since the customer does not gain control of those items until delivered to the site. Including the costs of those items would overstate the extent of our performance. Each project’s transaction price is included within the contract and although there is only one performance obligation, changes to the contract price could take place after fulfillment of the performance obligation. We have considered financing components on projects started during the year ended December 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 are expected to be received within one year from project completion and there were no adjustments to the contract values. Under ASC 606, we are required to recognize as an asset the incremental costs of obtaining a contract with a customer if those costs are expected to be recovered. We incur sales commissions that otherwise would not have been incurred if the contract had not been obtained. These costs are recoverable; however, we have elected the use of a practical expedient to expense these costs as incurred as the amortization period of the asset would be less than one year.
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. These services are treated as stand-ready performance obligations and are satisfied evenly over the length of the agreement, so we have elected a time-based method to measure progress and recorded revenue using a straight-line method.
Revenue Recognition – Service & Warranty Warranties for workmanship and roof penetration are included within each contract. These warranties cannot be purchased separately from the related services, are intended to safeguard the customer against workmanship defects and does not provide any incremental service to the customer. It is necessary for us to perform the specified tasks to provide assurance that the final product complies with agreed-upon specifications and likely do not give rise to a separate performance obligation. We will continue to account for any related warranties in accordance with ASC 460-10 and record an accrual for potential warranty costs at the completion of a project. Any services provided to a customer outside of warranties such as system inspections are recognized upon completion of the service. Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate anticipated losses based on the expected collectability of all of our accounts receivable, which takes into account collection history, the number of days past due, identification of specific customer exposure and current economic trends. When we determine a balance is uncollectible and no longer actively pursue collection of the account, it is written off. Inventory Inventory for our Solar Division segments consists primarily of solar energy system installation feescomponents (such as photovoltaic modules and salesinverters) located at our warehouses and is stated at the lower of renewable and sustainable energy products.cost (first-in, first-out method) or net realizable value. We recognize revenue from fixed price contracts using eitheridentify the completed or percentage-of-completion method,inventory items to be written down for obsolescence based on the sizeitem’s current sales status and condition. We write down discontinued or slow-moving inventories based on an estimate of the markdown to retail price needed to sell through our current stock level of the inventories on a quarterly basis. POWERHOUSE™ inventories are recorded at the lower of cost (incurred from third party supply channel manufacturers) or net realizable value. Cost is determined using the first-in, first-out method. Management will establish an estimated excess and obsolete inventory reserve based on slow-moving and obsolete inventory. At December 31, 2018, there was no excess and obsolete inventory reserve.
Warranties Currently, our standard manufacturing warranty for our POWERHOUSE™ solar shingle comes with a 11-year product warranty, which is the standard product warranty of most traditional solar panels today, and a 24-year power production warranty. We receive warranties from our supply chain matching the terms of the POWERHOUSE™ solar shingle warranty. We warrant our EPC solar energy systems sold to customers for up to ten years against defects in installation workmanship. The manufacturers’ warranties on the solar energy system installation. We recognize revenue from solar energy system installations of less than 250 kilowatts, or kW, when the installation is substantially complete, while we recognize revenue from solar energy system installations equal to or greater than 250 kW on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to total estimated costs for each contract. We recognize revenue from the sale of renewable and sustainable energy products when the following four basic criteriacomponents, which are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the seller’s pricetypically passed through to the buyer is fixedcustomers, typically have product warranty periods of 10 years and determinable; and (4) collectibility is reasonably assured. Goodwill
Goodwill represents the excessa limited performance warranty period of the purchase consideration over25 years. We generally provide for the estimated fair valuecost of assets acquired lesswarranties at the time the related revenue is recognized. We also maintain specific warranty liabilities assumedfor large commercial customers. We assess the accrued warranty reserve regularly and adjust the amounts as necessary based on actual experience and changes in a business acquisition. future estimates.
Goodwill is no longer amortized but is reviewedand Purchased Intangibles We review goodwill for impairment annually during the second quarter, or more frequently if a triggering event occurs between impairment indicators arise. We compare the estimated fair value oftesting dates. As a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwillresult of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value,annual impairment test, we fully impaired the goodwill balance charging an impairment test is performedloss to measure the amountconsolidated statement of impairment loss. Since we operate in only one business segment, impairment for us is assessed at the enterprise level, and we use a market value method for the purposes of testing for potential impairment. The annual process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many pointsoperations during the analysis. Applicationsecond quarter of alternative assumptions and definitions could yield significantly different results. Management’s discussion and analysis of financial condition and results of operations2018.
Up-front POWERHOUSE™ 3.0 license payments when incurred, costs to obtain UL certification and legal costs to acquire the License are initially capitalized and thereafter amortized to operations, commencing November 2018 after UL certification, on a straight-line basis over the expected life of the License through 2034. Purchase Accounting
Common Stock Warrants We account for common stock warrants in accordance with applicable accounting guidance provided in FASB ASC 480,Liabilities – Distinguishing Liabilities from Equity, as either liabilities or as equity instruments depending on the acquisitionspecific terms of the warrant agreement. Certain of our warrants are accounted for as liabilities due to provisions either allowing the warrant holder to request redemption, at the intrinsic value of the warrant, upon a controlling interestchange of control, event of default or failure to deliver shares. We classify these warrant liabilities on the Condensed Consolidated Balance Sheet as current or long-term liabilities based on their expiration date. They are revalued at each balance sheet date after their initial issuance with changes in the value recorded in earnings. The Company used a business usingMonte Carlo pricing model to value these warrant liabilities. The Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the purchase method. In determiningCompany to develop its own assumptions. The assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 to value the estimatedcommon stock warrant liabilities are as follows: | | | | | | | | | Closing | | | | | | | | | Market | | | Remaining | | | | | Exercise | | | | | | Market Price | | | Risk-free | | | Dividend | | | Price | | | Term | | | | | Price | | | Strike Floor | | | (average) | | | Rate | | | Yield | | | Volatility | | | (years) | | | Warrant Liability April 09, 2018 | | $ | 1.12 | | | $ | 0.97 | | | $ | 0.85 | | | | 2.60 | % | | | 0.00 | % | | | 120 | % | | | 5.00 | | | Warrant Liability June 30, 2018 | | $ | 0.55 | | | $ | 0.19 | | | $ | 0.57 | | | | 2.72 | % | | | 0.00 | % | | | 115 | % | | | 4.78 | | | Warrant Liability September 30, 2018 | | $ | 0.32 | | | $ | 0.19 | | | $ | 0.39 | | | | 2.93 | % | | | 0.00 | % | | | 115 | % | | | 4.53 | | | Warrant Liability December 31, 2018 | | $ | 0.32 | | | | N/a | | | $ | 0.52 | | | | 2.49 | % | | | 0.00 | % | | | 120 | % | | | 4.28 | |
The Company also holds common stock warrants which have been classified in equity. Upon conversion of the warrants, the Company determines the fair value of certain acquired assetsthe warrants exercised using the share price and records the impact to common stock and additional paid-in capital.
Derivatives The 2018 Notes contained conversion features which have been accounted for in accordance with FASB ASC 815,Derivatives and Hedging. The conversion options were embedded within the 2018 Notes but have been separated as (i) their economic characteristics and risks did not clearly and closely relate to the 2018 Notes (ii) the 2018 Notes were not remeasured at fair value and (iii) a separate instrument with the same terms as the conversion options would be considered a derivative. The 2018 Notes also contained various redemption clauses (contingent) that met all the criteria of a derivative and were measured and recorded at fair value at the date of issuance and were revalued at each balance sheet date with changes in the value recorded in earnings. We used a Lattice pricing model to value these derivative liabilities. The Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires us to develop its own assumptions. We classified these derivative liabilities we make assumptions basedon the Condensed Consolidated Balance Sheet as short-term liabilities since they had maturities of one year. When the conversion option was exercised, for accounting purposes both liabilities (i.e., the debt host and the separated derivative liability) were subject to extinguishment accounting. As such, a gain or loss upon historicalextinguishment of the two liabilities equal to the difference between the recorded value of the liabilities and other relevant information and, in some cases, independent expert appraisals. Assumptions may be incomplete, and unanticipated events and circumstances may occur that could affect the validity of such assumptions, estimates, or actual results. The estimated fair value of assetsthe consideration issued to extinguish them was recorded. The assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and liabilities acquired in recent business combinations are preliminary as of December 31, 2007. We expect2018 to obtain information necessary to finalizevalue the estimated values during 2008.derivative liabilities are as follows: | | | | | | Closing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market | | | | | | | | | Market | | | Remaining | | | | | | | | | First | | | Second | | | | | Conversion | | | Price | | | Risk-free | | | Dividend | | | Price | | | Term | | | Debt | | | Soft Call | | | Redemption | | | Redemption | | | | | Price | | | (average) | | | Rate | | | Yield | | | Volatility | | | (years) | | | Yield | | | Threshold | | | Period | | | Period | | | Derivative Liability April 09, 2018 | | $ | 1.26 | | | $ | 0.85 | | | | 2.08 | % | | | 0.00 | % | | | 110 | % | | | 1.00 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability June 30, 2018 | | $ | 0.55 | | | $ | 0.57 | | | | 2.23 | % | | | 0.00 | % | | | 130 | % | | | 0.78 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability September 30, 2018 | | $ | 0.31 | | | $ | 0.39 | | | | 2.36 | % | | | 0.00 | % | | | 125 | % | | | 0.53 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability December 31, 2018 | | $ | 0.31 | | | $ | 0.52 | | | | 2.45 | % | | | 0.00 | % | | | 90 | % | | | 0.28 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % |
Stock-BasedShare-Based Compensation
As of January 1, 2006, we adopted the provisions of SFAS No. 123(R),Accounting for Stock-Based Compensation (“SFAS 123(R)”), which requires companies to
We recognize compensation costexpense for stock-basedshare-based awards based on the estimated fair value of the award on the date of grant. We measure compensation cost at the grant date based on the estimated fair value of the award and recognize compensation cost uponexpense based on the probable attainment of a specified performance condition for performance-based awards or over a service period.period for time-based awards. We use the Black-Scholes option pricingvaluation model to calculateestimate the fair value disclosures under SFAS 123(R).for purposes of accounting and disclosures. In calculatingestimating this fair value, therecertain assumptions are certain highly subjective assumptions that we use, as disclosedused (see Note 11. Share-Based Compensation in note 6Item 8 of the notes to our consolidated financial statements, consisting of estimated market value of our stock,Financial Statements in this prospectus), including the expected life of the option, risk-free interest rate, dividend yield, volatility and volatility.forfeiture rate. The use of a different estimateestimates for any one of these componentsassumptions could have a material impact on the amount of calculatedreported compensation expense. We do not recognize share-based compensation expense unlessExpected volatilities were based on a value calculated using the historical stock price volatility. Expected life was based on the specific vesting terms of the options is probable. In determining the estimatedoption and anticipated changes to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model was based on U.S. Treasury zero-coupon securities with remaining terms similar to the expected term on the options. RGS does not anticipate paying any cash dividends on its Common Stock in the foreseeable future and, therefore, an expected dividend yield of our common stock atzero was used in the dateoption valuation model. The assumptions used to value to 2018 Options as of grant of stock awards, we set the market value at the higher of an independent offer to purchase a portion of us in exchange for preferred stock, the value of recent acquisitions, and an evaluation performed by an independent firm retained for that purpose.December 31, 2018 are as follows: | 2018 Non-Qualified Stock Options | | | | | | | | | | | | | | | | | | | Expected | | | | | | Market | | | | | Vesting | | Expected | | Dividend | | | Risk-free | | | Price | | | Grant Date | | Period | | Life | | Rate | | | Rate | | | Volatility | | | June 21, 2018 | | 2.78 years | | 4.2 years | | | 0 | % | | | 2.70 | % | | | 148.77 | % | | September 4, 2018 | | 2.82 years | | 5.7 years | | | 0 | % | | | 2.78 | % | | | 147.40 | % | | September 10, 2018 | | 2.81 years | | 5.7 years | | | 0 | % | | | 2.83 | % | | | 146.66 | % | | October 15, 2018 | | 2.96 years | | 4.3 years | | | 0 | % | | | 2.96 | % | | | 149.82 | % | | October 29, 2018 | | 2.92 years | | 4.3 years | | | 0 | % | | | 2.87 | % | | | 150.34 | % |
Income Taxes For financial reporting purposes, income tax expense and deferred income tax balances were calculated as if we were a separate entity and had prepared our own separate tax return.
We provide forrecognize income taxes pursuant tounder the asset and liability method as prescribed in SFAS No. 109,Accounting for Income Taxes. The liability method requires recognition of deferredmethod. Deferred income taxes are recognized based on temporary differences between financial reporting and income tax bases of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss carry-forward prior to its expiration, is more likely than not. Our effective tax rate remains fairly consistent. After the date we cease to be a member of Gaiam’s consolidated group for federal income tax purposes, to the extent we become entitled to utilize loss carryforwards from our separate tax returns, we will distribute to Gaiam the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. Accordingly, we expect to recognize aA valuation allowance against certain of our deferred tax assets as of the effective date of the tax sharing agreement. As of December 31, 2007, we had NOL carryforwards of approximately $6.9 million, meaning that such potential future payments to Gaiam, which would be made over a period of several years, would therefore aggregate to approximately $2.6 million. These NOL carryforwards expire beginning in 2020 if not utilized. Due to Gaiam’s step acquisitions of our company, we experienced “ownership changes” as defined in Section 382 of the Internal Revenue Code. Accordingly, our use of the NOL carryforwards is limited by annual limitations described in Sections 382 and 383 of the Internal Revenue Code. We expect our NOLs to be fully recoverable unless we make a public offering of more than 20% of our capital, in which case we will effectively lose one year of our carryforward period and have to impair our deferred tax asset by approximately $0.2 million.
Management’s discussion and analysis of financial condition and results of operations
Effective January 1, 2007, we adopted the provisions of SFAS Interpretation No. 48,Accounting of Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109(“FIN 48”). Under FIN 48, we must recognize the tax benefit from an uncertain tax position onlyestablished if it is more likely than not that a deferred tax asset will not be realized. In determining the appropriate valuation allowance, we consider projected realization of tax position will be sustained on examination by the taxing authorities,benefits based on the technical meritsexpected levels of thefuture taxable income, available tax planning strategies, and our overall deferred tax position. We measure the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to our subjective assumptions and judgments which can materially affect amounts recognized in our consolidated financial statements.
Results of Operations
Year Ended December 31, 20072018 Compared to Year Ended December 31, 20062017 Net
POWERHOUSE™ Segment:
We received our first purchase order from a customer on December 27, 2018 and shipped to the customer in January 2019. Accordingly, we have no revenue during 2018 from POWERHOUSE™ and a backlog of one transaction. We commenced amortization of the POWERHOUSE™ license upon receiving UL approval on November 2, 2018 and have recorded two months of amortization expense of $0.03 million. Solar Division Segments: Contract revenue:
Sale and installation of solar energy systems. NetSale and installation of solar energy system revenue increased $2.1decreased $2.5 million, or 12.6%17.9%, to $18.9$11.5 million during 2007the twelve months ended December 31, 2018, from $16.8$14.0 million during 2006.the twelve months ended December 31, 2017. During the twelve months ended December 31, 2018, installations decreased 0.5 megawatts to 2.8 as compared to the 3.3 megawatts installed during the twelve months ended December 31, 2017. This increase in net revenuedecrease was primarily reflects the additional revenue recognizeddue to slower sales in the Northern California market as a resultbeginning of the acquisitionyear and a decline in our weighted average selling price per watt of Marin Solar2.6%. Additionally, limitations including cutbacks of major incentive programs in November 2007Massachusetts and increased penetrationRhode Island caused delays in existing markets.the installation of our backlog in the fourth quarter of 2018 as approvals required for installation were not available. This delayed the installation of many projects in the fourth quarter, as Massachusetts and Rhode Island comprised a significant portion of our backlog in 2018. As previously disclosed, we are exiting our Mainland residential solar business. Gross profit
Contract expenses:
Installation of solar energy systems. Gross profit increased $0.5Installation of solar energy system expenses decreased $1.9 million, or 14.5%, to $11.2 million during the twelve months ended December 31, 2018, from $13.1 million during the twelve months ended December 31, 2017, which corresponds to the reduction of installation revenue during this same time comparison. We utilize gross margin percentage to measure performance utilizing an internal time reporting system allowing us to measure both total incurred contract expense and contract expense excluding construction crew idle time. For the twelve months ended December 31, 2018, our residential segments gross margin without idle time declined due to a 2.6% decline in the average selling price per watt exceeding the 0.8% decline in the costs of installation per watt. Customer acquisition.Customer acquisition expense decreased $2.3 million during the twelve months ended December 31, 2018, or 38.9%, to $3.6 million from $5.9 million during the twelve months ended December 31, 2017. This decrease is primarily attributable to a reduction in workforce related to a targeted focus on increasing individual sales team member key performance indicators and a more selective hiring process allowed for significant improvements in lead performance. Our continued efforts to refine our digital lead development also played a large role in the decrease. Operating expense: Operating expenses decreased $1.0 million, or 9.2%, to $6.5$9.8 million during 2007 from $6.0the twelve months ended December 31, 2018 compared to $10.8 million during 2006. As a percentage of net revenue, gross profit decreased to 34.3% during 2007 from 35.4% during 2006. The decrease in gross profit percentage primarily reflects the acquisition of Marin Solar, which historically has produced lower margins. Selling and operating expenses. Selling and operating expenses increased $0.8 million, or 15.4%, to $5.7 million during 2007 from $5.0 million during 2006. As a percentage of net revenue, selling and operating expenses increased to 30.3% during 2007 from 29.5% during 2006. The increase in selling and operating expenses resulted primarily from investments in personnel to support the revenue increases described above and the addition of costs associated with the acquisition of Marin Solar in November 2007.
General and administrative expenses. General and administrative expenses increased $15,000, or 2.6%, to $0.6 million during 2007 from $0.6 million during 2006. As a percentage of net revenue, general and administrative expenses decreased to 3.1% during 2007 from 3.4% during 2006, reflecting the stabilization of our fixed costs.
Year Endedtwelve months ended December 31, 2006 Compared to Year Ended December 31, 2005
Net revenue. Net revenue increased $4.7 million, or 38.8%, to $16.8 million during 2006 from $12.1 million during 2005. The increase in net revenue resulted primarily from increased sales in our existing California solar energy systems market and the launch of our solar energy system installations in Colorado.
Gross profit. Gross profit increased $1.6 million, or 36.8%, to $6.0 million during 2006 from $4.4 million during 2005. As a percentage of net revenue, gross profit decreased to 35.4% during 2006 from 35.9% during 2005.
Selling and operating expenses. Selling and operating expenses increased $1.5 million, or 43.3%, to $5.0 million during 2006 from $3.5 million during 2005. As a percentage of net revenue, selling and operating expenses increased to 29.5% during 2006 from 28.6% during 2005. This increase was2017, primarily due to increased sellinga decrease in labor and operating expenses to support the revenue growth described above, the addition of the Colorado solar energy systems sales and support team, and other investments in our infrastructure.
Management’s discussion and analysis of financial condition and results of operationslegal fees.
Other Segment: General and administrative expenses. General and administrative expenses
Goodwill impairment. Goodwill impairment increased $75,000, or 15.2%, to $0.6by $1.3 million during 2006 from $0.5 million during 2005. As a percentage of net revenue, general and administrative expense improvedthe year ended December 31, 2018 due to 3.4% during 2006 from 4.1% during 2005, reflecting the stabilization of our fixed costs. Quarterly and Seasonal Fluctuations
The following table sets forth our unaudited quarterly results of operations during each of the quarters in 2006 and 2007. We believe this unaudited financial information includes all adjustments, consisting solely of normal recurring accruals and adjustments, necessary for a fair presentation of the results of operationsour annual impairment testing. We concluded that the fair value of the goodwill no longer exceeded its carrying value and wrote off the goodwill balance.
Litigation and proxy contest expense.Litigation and proxy contest expenses during the twelve months ended December 31, 2018 was $0.2 million compared to $1.5 million during the twelve months ended December 31, 2017. The decrease of $1.3 million is primarily attributable to nonrecurring proxy contest expenses of $1.2 million in 2017. Our legal expenses may increase in subsequent periods. See Note 7. Commitments and Contingencies. Change in fair value of derivative liabilities, loss on debt extinguishment and amortization of debt discount & deferred loan costs. The issuance of the 2018 Notes, subsequent conversions and revaluation of the derivative liabilities resulted in our recording derivative liabilities as disclosed in Note 9. Convertible Debt. Additionally, interest expense increased due to the accretion of the debt discount and deferred loan costs related to the 2018 Notes. No such transaction occurred during the year ended December 31, 2017.
Other (income) expenses. Other expenses primarily represent a gain on settlement of a long-term liability with a directors and officers liability insurance provider.
Liquidity and Capital Resources
Our historical operating results indicate substantial doubt exists related to our ability to continue as a going concern. Management’s plans and actions, which are intended to mitigate the substantial doubt raised by our historical operating results in order to satisfy our estimated liquidity needs for a period of 12 months from the quarters presented. This financial information should be read in conjunction with ourissuance of the consolidated financial statements, are discussed below. As we cannot predict, with certainty, the outcome of our actions to generate liquidity, or whether such actions would generate the expected liquidity as currently planned, management’s plans to mitigate the risk and related notes included elsewhere in this prospectus. The results of operations for any quarterextend cash resources through the evaluation period, are not necessarily indicative of future results of operations.considered probable under current accounting standards for assessing an entity’s ability to continue as a going concern. | | | | | | | | | | | | | | | (in thousands, except per share data) | | Fiscal Year 2006 Quarters Ended | | | | March 31 | | | June 30 | | September 30 | | December 31 | Net revenue | | $ | 3,197 | | | $ | 4,443 | | $ | 4,849 | | $ | 4,323 | Gross profit | | | 958 | | | | 1,485 | | | 1,457 | | | 2,050 | Income (loss) before income taxes | | | (113 | ) | | | 144 | | | 59 | | | 329 | Net income (loss) | | | (67 | ) | | | 86 | | | 35 | | | 196 | Diluted net income (loss) per share | | $ | (0.01 | ) | | $ | 0.01 | | $ | 0.00 | | $ | 0.02 | Weighted average shares outstanding-diluted | | | 10,000 | | | | 10,000 | | | 10,000 | | | 10,000 |
| | | | | | | | | | | | | | | (in thousands, except per share data) | | Fiscal Year 2007 Quarters Ended | | | | March 31 | | June 30 | | September 30 | | | December 31 | Net revenue | | $ | 4,364 | | $ | 4,514 | | $ | 4,279 | | | $ | 5,765 | Gross profit | | | 1,488 | | | 1,763 | | | 1,285 | | | | 1,960 | Income (loss) before income taxes | | | 72 | | | 275 | | | (206 | ) | | | 45 | Net income (loss) | | | 40 | | | 151 | | | (113 | ) | | | 24 | Diluted net income (loss) per share | | $ | 0.00 | | $ | 0.02 | | $ | (0.01 | ) | | $ | 0.01 | Weighted average shares outstanding-diluted | | | 10,000 | | | 10,000 | | | 10,000 | | | | 10,000 |
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 and other factors. With regards to our renewable and sustainable energy products sold through catalogs and the Internet, sales tend to peak during the spring and end of year holiday seasons.
Liquidity and Capital Resources
Our capital needs arise from working capital required to fund our purchases of solar PV modules and inverters, capital related to acquisitions of new businesses, development of renewable energy products, replacements, expansions and improvements to our infrastructure, and future growth. These capital requirements depend on numerous factors, including business acquisitions, the ability to attract new solar energy system installation customers, market acceptance of our product offerings, the cost of ongoing upgrades to our product offerings, the level of expenditures for sales and marketing, the level of investment in support systems and facilities and other factors. The timing and amount of these capital requirements are variable and cannot accurately be predicted. Recently, we acquired two solar energy system installation businesses. We plan to continue to pursue business acquisition and other opportunities to expand our sales territories, technologies, and products and increase our sales and marketing programs as needed.
Management’s discussion and analysis of financial condition and results of operations
Intercompany Borrowings from Gaiam
Prior to this offering and since 1999, our business has been funded through our operating income, supplemented by intercompany borrowings from Gaiam. As of December 31, 2007,2018, we had approximately $0.5have cash of $5.8 million, inworking capital of $6.9 million, debt of $0.3 million and shareholders’ equity of $10.8 million.
We have experienced recurring operating losses and negative cash flow from operations which have necessitated: | · | Exiting the mainland residential division and execution of a reduction in workforce, see Note 16. Subsequent Events; |
| · | Focusing on growing POWERHOUSE™ revenue through a re-allocation of personnel to POWERHOUSE™ sales and initiating sales to other solar installers and distribution companies; and |
| · | Raising additional capital. See Note 8. Shareholders Equity and Note 16. Subsequent Events for transactions to raise capital during the second quarter of 2019. |
No assurances can be given that we will be successful with our plans to grow revenue for profitable operations. We have historically incurred a cash outflow from our operations as our revenue has not been at a level for profitable operations. As discussed above, a key component of our revenue growth strategy is the sale of our POWERHOUSE™ 3.0 in-roof solar shingle. We obtained UL certification for POWERHOUSE™ at the close of 2018 and therefore only recently begun to market POWERHOUSE™ at the start of 2019. We believe that we will require several quarters for us to generate sales to meet our goals for profitable operations. The first quarter of the year has always been one of our slowest sales periods and as such, this is a period of higher cash equivalentsoutflow. POWERHOUSE™ 3.0 sales during the first quarter of 2019 have been materially less than our expectations and, approximately $16.3 millionaccordingly, we raised additional capital during the second quarter of intercompany borrowings owed2019. Additionally, we have arranged with a third-party specialty lender to Gaiam. provide financing to our POWERHOUSE™ roofers for their purchases of POWERHOUSE™ in-roof shingles. Under this agreement, we are to be paid the next day after the roofers place a purchase order and, accordingly, when roofers avail themselves of this financing, we do not have accounts receivable, enhancing our cash flow from operations. As discussed above, (i) we expect that future sales of POWERHOUSE™ 3.0 in-roof solar shingles will be our primary source of revenue and (ii) we only recently began marketing POWERHOUSE™ 3.0, and accordingly, we expect to incur a quarterly cash outflow for a portion of 2019. We have placed purchase orders with our supply chain partners for inventory to be converted to revenue. The intercompany borrowings include amounts used to acquire and expand our business.Company has prepared its business plan for the ensuing twelve months, which includes the following: | · | Exit from the mainland residential division which historically has generated material cash outflows; |
| · | Generate POWERHOUSE™ revenue through sales to local roofing companies, home builders and EPC companies; |
| · | Convert current mainland residential backlog into revenue through authorized third-party integrators; and |
| · | Increase sales and installations with commercial customers on the mainland and sales and installations of residential and commercial systems in Hawaii. |
Cash FlowsSolar Energy Systems
The following table summarizesmost visible component of solar energy systems are the solar shingles or photovoltaic modules with metal racking which transforms the sunlight into direct electrical current (“DC”), which then travels to the inverter. The inverter converts the DC electricity into useable alternating current that matches the current of the household electrical service and the utility grid. Other major components include the monitoring system which tracks the solar production of the system, and balance of system which includes mechanical and electrical parts. The electricity created can go onto the grid or be used by the customer to power household items such as lights and appliances. For customers who would like to have electrical black out protection or who want to strategically manage their electrical usage, we provide battery solutions that integrate with our primary sources (uses) of cash during the periods presented:solar energy systems. POWERHOUSE™: Our product is a built-in photovoltaic array (“BIPV”), also known as a solar shingle. The solar shingle is a building material that once installed becomes the roof structure. The BIPV is the equivalent of the photovoltaic module and racking of a traditional solar energy installation. We do not install these systems. Instead, we manufacture the solar shingle for distribution to our targeted customers. | | | | | | | | | | | | | | | | Years ended December 31, | | | (in thousands) | | 2005 | | | 2006 | | | 2007 | | Net cash provided by (used in): | | | | | | | | | | | | | Operating activities | | $ | (620 | ) | | $ | (2,049 | ) | | $ | 1,306 | | Investing activities | | | — | | | | (42 | ) | | | (3,378 | ) | Financing activities | | | 719 | | | | 2,125 | | | | 2,366 | | | | | | | | | | | | | | | Net increase in cash and cash equivalents | | $ | 99 | | | $ | 34 | | | $ | 294 | | | | | | | | | | | | | | |
Solar Division: The Solar Division sells and installs traditional modules and racking photovoltaic solar energy systems. We do not manufacture any of these components. We purchase all components from the manufacturer or their distributors. Operating activitiesWarranty Terms
POWERHOUSE™: We issue a manufacturer’s warranty on POWERHOUSE™ solar shingles, equal to the third-party manufacturer terms we secure. Workmanship warranty will be provided by the installer. Our new home builder and roofer network, when applicable, will submit to us a return merchandise authorization (“RMA”) for defective components. We will authorize the RMA and transfer substitute POWERHOUSE™ component(s) to the customer who will return a like number of defective components. We will similarly execute a RMA with the appropriate manufacturer. Solar Division: We and our suppliers offer warranties of up to 10 years for parts and labor, including property damage arising from workmanship, excluding roof penetrations which are generally warrantied for a period of 5 years. All major components installed in a photovoltaic system array are covered under transferable manufacturers’ warranties, which generally range from 10 to 25 years. Customer claims are processed through our customer service department. We will provide reasonable assistance to our customers in contacting the manufacturer concerning warranty service and undertake reasonable effort to recoup our labor costs from the manufacturer.
Financing We make available to our POWERHOUSE™ local roofing company customers a business-to-business lender to finance their purchases from us. We offer our Solar Division customers a choice to finance their solar systems with their cash, third-party loans, or third-party leases or power purchase agreements. We are constantly vetting new financing products and only refer the ones that fit the customer’s needs and desires. Our menu of finance offerings allows us to provide solar energy systems to our customers with financing terms that we believe are economically attractive for their individual situation. Sales and Marketing Our targeted customers for our POWERHOUSE™ in-roof solar shingle include (i) homeowners, (ii) local roofing companies, (iii) solar installation companies, (iv) custom homebuilders and (v) mass market homebuilders. We utilize our call center to contact customers in our geographic markets. We offer additional services, such as marketing support, referrals and on-site training to roofing companies that complete our requirements for becoming a POWERHOUSE™ Professional. We have and plan to continue to make marketing expenditures to develop brand name recognition for POWERHOUSE™. Our operating activities provided net cash of $1.3 million during 2007marketing has to-date included digital marketing, attendance at trade shows and used net cash of $2.0 million during 2006. Our net cash generated from operating activities during 2007 was primarily attributable to cash provided by increased accounts payable of $0.7 millionexpos, and increased deferred revenue on uncompleted contracts of $0.6 million, partially offset by uses of funds resulting from increased deferred costs on uncompleted contracts of $0.5 million. Our net cash used in operating activities during 2006 was primarily attributable to increases in inventory and accounts receivable by $1.6 million and $1.0 million, respectively, and reductions of accounts payable by $0.4 million, partially offset by cash provided by deferred income taxes of $0.4 million.we have arranged for television presentations. Investing activities. Our investing activities used net cash of $3.4 million and $42,000 during 2007 and 2006, respectively. The cash used in investing activities during 2007 was used primarily to acquire Marin Solar on November 1, 2007 and in 2006 to acquire property and equipment.
Financing activities. Our financing activities provided net cash of $2.4 million and $2.1 million during 2007 and 2006, respectively. The financing provided during both 2007 and 2006 that came from Gaiam was used to fund our daily operations and to acquire Marin Solar in November of 2007. We plan to repay these amounts with proceeds from this offering.
We believe our available cash, cash expected to be generated from operations, and cash generated by the sale of Class A common stock should be sufficient to fund our business for the foreseeable future. However, our projected cash needs may change as a result of possible acquisitions, unforeseen operational difficulties, or other factors.
In the normal courseSolar Division, we have trained our residential and commercial sales organization to effectively engage prospective customers from initial interest to customized proposals to signed contracts. As previously disclosed, we are exiting our Mainland residential solar business. We intend to continue to educate consumers about the benefits of our business, we investigate, evaluatesolar products in order to lower our customer acquisition costs and discuss acquisition, joint venture, minority investment, strategic relationship and other business combination opportunities infurther expand the solar energy markets. For any future investment, acquisition, or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities, or incurring additional indebtedness. Management’s discussion and analysis of financial condition and results of operations
Contractual Obligations
We have commitments under operating leases, our payable to Gaiam, and various service agreements with Gaiam (see note 10 to our notes to consolidated financial statements), but do not have any outstanding commitments under long-term debt obligations or purchase obligations. The following table shows our commitments to make future payments under operating leases and our payable to Gaiam:
| | | | | | | | | | | | | | | | | (in thousands) | | Total | | < 1 year | | 1-3 years | | 3-5 years | | > 5 yrs | Operating lease obligations | | $ | 240 | | $ | 132 | | $ | 108 | | $ | — | | $ | — | Payable to Gaiam(1) | | | 16,286 | | | 16,286 | | | — | | | — | | | — | | | | | | | | | | | | | | | | | Totals | | $ | 16,526 | | $ | 16,418 | | $ | 108 | | $ | 0 | | $ | 0 | | | | | | | | | | | | | | | | |
(1)
| Represents the balance of our intercompany payable to our parent, Gaiam. We have no formal written loan agreement with Gaiam regarding our intercompany payable. We intend to repay the entire balance with the proceeds from this offering. As of the date of this prospectus, the payable to Gaiam was approximately $19.8 million. See “Use of Proceeds.”
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After the date we cease to be a member of Gaiam’s consolidated group for federal income tax purposes, to the extent we become entitled to utilize loss carryforwards from our separate tax returns, we will distribute to Gaiam the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. Accordingly, we expect to recognize a valuation allowance against certain of our deferred tax assets as of the effective date of the tax sharing agreement. As of December 31, 2007, we had net operating loss carryforwards, or NOLs, of approximately $6.9 million, meaning that such potential future payments to Gaiam, which would be made over a period of several years, would therefore aggregate to approximately $2.6 million. These NOLs expire beginning in 2020 if not utilized. Due to Gaiam’s step acquisitions of us, we experienced “ownership changes” as defined in the Internal Revenue Code. Accordingly, our use of these NOLs is limited by annual limitations described in the Internal Revenue Code. We expect our NOLs to be fully recoverable unless we make a public offering of more than 20% of our capital, in which case we will effectively lose one year of our carryforward period and have to impair our deferred tax asset by approximately $0.2 million.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 141 (Revised 2007),Business Combinations (“SFAS 141R”). This statement will significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific items, including the following:market opportunity.
| | • | ØInside sales– Our inside sales groups initially engage with potential customers prior to our outside sales or e-sales teams’ customer engagement. Inside sales groups identify each potential customer’s initial interest in solar energy and compile data necessary to assess potential cost savings for subsequent discussion with the potential customer by the sales teams. |
acquisition costs will be generally expensed as incurred,
| • | Direct outside sales– We employ an outside commercial sales force in the east coast markets and Hawaii to generate new business and complete sales orders. Effective March 1, 2018, we completed a realignment of our sales teams resulting in the elimination of our east coast residential sales force. |
| | Ø• | | noncontrolling interests (formerly known as “minority interests”—see SFAS 160 discussion below) willCustomer referrals – Our customer referral program is designed to be valued at fair value at the acquisition date,
an effective and efficient method of reaching new customers. Our program provides cash incentives to current customers to refer friends, relatives and co-workers. |
| | Ø• | | acquired contingent liabilities will be recorded at fair value atOnline Digital Marketing– Consumers seek online education, purchase options, and business reviews before determining the acquisition datebest provider to meet their needs. To align our business with marketplace, and subsequently measured at eitherour sales teams with the higher of such amount or the amount determined under existing guidance for non-acquired contingencies,
consumer, we continue to expand our online market presence. |
Customers POWERHOUSE™: Our customers will include homeowners, new homebuilders, engineering, procurement and construction (“EPC”) solar companies and roofers in the re-roof market. We estimate there are approximately 7 million re-roofs and new home construction annually in the United States. Solar Division: Our residential customers are homeowners interested in reducing electrical utility costs and switching to clean, renewable energy. Our residential solar energy systems are generally rooftop installations up to 24kW in size. Our commercial customers come from a variety of industries including retail, manufacturing, service, not-for-profit and municipal services. Oftentimes, our small commercial clients arise from the relationship developed when we install a residential solar system to the owner of the small business. Our commercial solar energy systems may be roof mounted or ground mounted and are generally up to 500kW in size. Occasionally, through the course of our normal operations, we are presented with opportunities for larger (greater than 500kW) commercial solar energy systems. We evaluate each of these large opportunities on a case by case basis while minimizing onerous contract terms. Suppliers POWERHOUSE™: We engage third-party manufacturers to manufacture components of the in-roof POWERHOUSE™ solar shingle. The major components of the POWERHOUSE™ solar shingle consist of the solar laminate, connectors, wire harnesses, base assembly and integrated flashing system. The solar laminate, connectors and wire harnesses are produced by a manufacturer located in China and shipped to our U.S. based manufacturer of the baseplate for assembly into a solar shingle. The solar shingle is then shipped to our third-party logistics provider to warehouse and distribute kitted systems to our customers. Solar Division: Our solar energy systems utilize photovoltaic modules and inverters purchased from several manufacturers and distributors. The majority of these materials are “Buy American” under the American Recovery and Reinvestment Act of 2009. We negotiate pricing based on quantity purchased and payment terms. Generally, we purchase major components as needed and do not have long-term or volume commitments with suppliers. Competition POWERHOUSE™: Dow developed the POWERHOUSE™ solar shingle and holds various related worldwide patents. Since we obtained the exclusive License to commercialize the product worldwide from Dow, the patents and licenses provide a barrier to entry, thereby limiting the number of competitors. Existing sources of competition include Tesla, Inc., Suntegra and CertainTeed, whom we compete with on market penetration, price and aesthetics. We believe we compete favorably with these companies.
Solar Division: We believe our primary competitors are the traditional local utilities that supply energy to our potential customers. We compete with these traditional utilities primarily based on price, predictability of price and the ease by which customers can switch to electricity generated by our solar energy systems rather than fossil-based alternatives. We believe that our pricing and focus on customer relationships allow us to compete favorably with traditional utilities in the regions we service. Other sources of competition are other solar energy system providers such as Tesla, Inc., Vivint Solar Inc., Sunrun Inc., Sungevity, Inc., and many others. These companies may offer products that are similar to our solar energy systems, and we primarily compete with these companies based on price. We believe that we compete favorably with these companies. Regulations POWERHOUSE™: We will have to maintain compliance with UL standards on POWERHOUSE™ 3.0 solar shingles and on any future new product development. Solar Division: An interconnection agreement is generally required from the applicable local electricity utility to interconnect a solar energy system with the utility grid. In almost all cases, interconnection agreements are standard form agreements that have been pre-approved by the local public utility commission or other regulatory body with jurisdiction over interconnection. As such, no additional regulatory approvals are required once interconnection agreements are signed. We prepare and submit these agreements on behalf of our customers to ensure compliance with interconnection rules. Our operations are subject to stringent and complex federal, state and local laws and regulations governing the occupational health and safety of our employees and wage regulations. For example, we are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or “OSHA”, and comparable state laws that protect and regulate employee health and safety. We expend resources to comply with OSHA requirements and industry best practices. Federal and/or state prevailing wage requirements, which generally apply to any “public works” construction project that receives public funds, may apply to installations of our solar energy systems on government facilities. The prevailing wage is the basic hourly rate paid on public works projects to a majority of workers engaged in a particular craft, classification or type of work within a particular area. Prevailing wage requirements are established and enforced by regulatory agencies. Our in-house personnel monitor and coordinate our continuing compliance with these regulations when required. Some jurisdictions place limits on the size or number of solar energy systems that can be interconnected to the utility grid. This can limit our ability to sell and install solar energy systems in some markets. The regulatory environment is constantly changing. Government Incentives and Policies U.S. federal, state and local governments have established various policies, incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives include tax credits, cash grants, production-based incentives, tax abatements and rebates. These incentives help catalyze private sector investments in solar energy, energy efficiency and energy storage measures, including the installation and operation of residential and commercial solar energy systems. Following the extension of the Solar Investment Tax Credit in December 2015, the Internal Revenue Code allows a United States taxpayer to claim a tax credit of 30% of qualified expenditures for a solar energy system that is placed in service on or before December 31, 2019. This credit is scheduled to decline to 26% effective January 1, 2020, 22% in 2021, and then to 10% for commercial projects and 0% for residential projects in 2022. Many U.S. states and local jurisdictions have established property tax incentives for renewable energy systems, which include exemptions, exclusions, abatements and credits. Many state governments, investor-owned utilities, municipal utilities and co-operative utilities offer rebates or other cash incentives for the installation and operation of a solar energy system or energy-related products. in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date,
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Management’s discussionMany states have a regulatory policy known as net energy metering, or net metering. Net metering typically allows our customers to interconnect their on-site solar energy systems to the utility grid and analysisoffset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar energy system that is exported to the grid in excess of financial condition and results of operationselectric load used by customers.
Some states have established limits on net metering, fees on solar energy systems, or reduced the credit available for electricity generated by solar energy systems that are connected to the utility grid. For example, Hawaii, Nevada and Mississippi have announced net metering policies that establish wholesale rates, not retail rates, for crediting electricity produced by solar energy systems. This has adversely impacted the attractiveness of solar energy to residential customers in these markets. The California Public Utilities Commission issued a ruling that maintains the net energy metering credit at full retail value but adds new charges and requirements for customers installing a solar energy system. On the other hand, other states continue to expand their net metering programs. New York, for example, has suspended its cap on solar photovoltaic systems covered by the state’s net metering program. Some states like Massachusetts have offered Solar Renewable Energy Credits (“SRECs”) that provide cash payments based on the electricity produced by solar energy systems as an incentive for customers to invest in these systems. These programs are generally capped and must be reauthorized or extended when the cap is reached in order for the incentives to be continued. The Massachusetts Department of Energy Resources announced that the total capacity available under its most recent SREC program (SREC-II) for projects over 25 kW had been exceeded in early 2016, however it was announced on January 31, 2017 by the Massachusetts Department of Energy Resources that their new program, called Solar Massachusetts Renewable Target (“SMART”), is targeted to start in April 2018 and that the SREC II program would be extended in order to bridge between the two programs. The SREC II program was ultimately extended until November 26, 2018, at which point the first applications for SMART were accepted. The first SMART incentive allocations began January 15, 2019. On January 22, 2018, the Office of the President of the United States approved in substantial form, recommendations by the U.S. International Trade Commission to impose a tariff of 30% on imports of solar cells and photovoltaic modules under Section 201 of the Trade Act of 1974, unless specifically excluded. The 30% tariff declines 5% per year over the four-year term of the tariff. Further, the provisions of the 201 Tariff are applicable to imported solar cells and modules from Canada, despite its being a member of the North American Free Trade Act. 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 systems, with the fourth and first quarters of the year seeing less sales orders than the second and third quarters. As previously disclosed, we are exiting our Mainland residential solar business. As we have just begun to market POWERHOUSE™ in-roof shingles, we do not have historical experience to assess seasonality for this line of business. Employees As of April 29, 2019, we had approximately 60 total and full-time employees. None of our employees are represented by a labor union or subject to a collective bargaining agreement. Offerings On January 4, 2018, we closed the January 2018 Offering. On April 9, 2018, we closed the April 2018 Offering. On April 2, 2019, we closed the April 2019 Offering. DESCRIPTION OF PROPERTY Our principal executive offices are located in Denver, Colorado. The following table sets forth certain information relating to our primary facilities: | ØPrimary Locations | | restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date,Size (sq. ft.)
| | | Use | | Lease Expiration | | Business Segment | | Denver, CO | | | 12,477 | | | Corporate Headquarters | | May-22 | | All | | Bloomfield, CT | | | 10,000 | | | Office and warehouse | | Nov-19 | | Solar Division | | Kailua, HI | | | 10,000 | | | Office and warehouse | | Dec-19 | | Solar Division |
Existing facilities have lease renewal options ranging from 1 month to 5 years. LEGAL PROCEEDINGS From time to time, we are involved in legal proceedings that we consider to be in the normal course of business. MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market Information and Holders Effective February 15, 2019, our Common Stock was quoted on the OTCQX under the symbol “RGSE.” Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. Prior to such date, our Common Stock traded on the Nasdaq Capital Market under the same symbol. On May 1, 2019, we had 87 shareholders of record and 109,639,125 shares of $.0001 par value Common Stock and zero shares of $.0001 par value Class B common stock outstanding. Dividend Policy We have not declared or paid any cash dividends on our Common Stock, and we do not anticipate doing so in the foreseeable future. We currently intend to retain future earnings, if any, to operate our business and support our future growth strategies. Any future determination to pay dividends on our Common Stock will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, contractual restrictions, restrictions imposed by applicable law, capital requirements and other factors that our Board of Directors deems relevant. Equity Compensation Plan Information The following table summarizes equity compensation plan information for our Common Stock as of December 31, 2018: | | | Number of securities
to be issued upon
exercise of
outstanding options | | | Weighted average
exercise price of
outstanding options | | | Number of securities
remaining available
for future issuance
under equity
compensation plans | | | Equity compensation plans approved by security holders | | | 1,206,645 | | | $ | 3.22 | | | | 93,500 | |
| | Ø43 | | changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in the statement are a substantial number of new disclosure requirements. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing GAAP until January 1, 2009. Consequently, we will adopt the provisions of SFAS 141R forconjunction with our fiscal year beginning January 1, 2009. We believe that SFAS 141R is applicable to us, but cannot yet reasonably estimate the impact of the statement. In December 2007, FASB issued FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in theaudited consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the estimated fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We will adopt SFAS 160 at the beginning of our fiscal year commencing January 1, 2009. We believe SFAS 160 will be applicable to us, but cannot yet reasonably estimate the impact to our consolidated financial statements.
In September 2006, FASB issued FASB Statement No. 157,Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. We will adopt the provisions of SFAS 157 in our fiscal year commencing January 1, 2008. We currently believe that adoption of the provisions of SFAS 157 will not have a material impact on our consolidated financial statements.
In June 2006, FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.related footnotes. This Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statement, in the period this Interpretation is adopted. Consequently, we adopted the provisions of FIN 48 for our fiscal year beginning on January 1, 2007 and it has not had a material impact on our consolidated financial statements.
Management’s discussion and analysis contain statements of a forward-looking nature relating to future events or our future financial conditionperformance. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, level of operationsactivity, 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 this prospectus.
Overview 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, whichFor the last 40 years, we have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
Quantitativea residential and Qualitative Disclosures About Market Risk
We are exposed to market risks, which include foreign exchange rates and changes in U.S. interest rates. We do not engage in financial transactions for trading or speculative purposes.
We purchase a significant amount of renewable energy and organic product inventory from vendors outside of the United States in transactions that are primarily U.S. dollar denominated transactions. Since the percentage of our international purchases denominated in currencies other than the U.S. dollar is small any currency risks related to these transactions are immaterial to us. However, a decline in the relative value of the U.S. dollar to other foreign currencies could lead to increased purchasing costs. In order to mitigate this exposure, we make virtually all of our purchase commitments in U.S. dollars.
Business
Introduction
We are a leading residentialbusiness commercial solar energy integrator, ranking number one in California, which currently represents approximately two-thirds of the total U.S. market for grid-connected solar energy systems.EPC company. We offer turnkey services, to our customers, including the design, procurement, installation,permitting, build-out, grid connection, monitoring, maintenance and referrals for third-party financing of solar energy systems. We have 30 years of experience in residential solar energy, beginning with our sale in 1978 of the first solar photovoltaic, or PV, panels in the United States. We believe that we have installed more residential solar energy systems in the United States than any other company, including more than 2,400 residential and small commercial solar energy systems. In addition, we have sold a variety of solar products to more than 30,000 customers since our founding.
During the fiscal year ended December 31, 2007, on a pro forma basis, our net revenue was $32.7 million, and we generated a 30.0% gross margin and $1.0 million of income from operations. During the fiscal year ended December 31, 2006, our net revenue was $16.8 million. Immediately after the completion of this offering, after application of the net proceeds of this offering, we will have $ million of cash and no outstanding debt.
Our focused customer acquisition approach enables us to have what we believe is the lowest customer acquisition costs in the industry. We believe that our Real Goods brand has a national reputation for the highest quality customer service in the solar energy market, which leads to a significant number of word-of-mouth referrals and new customers. In addition, our parent company, Gaiam, is a leader in the sustainablewarranty and renewable energy lifestyle market and has a base of over 8 million direct customers, providing us additional lead generation for potential solar energy customers. We also cross-market other renewable energy lifestyle products and services, in addition to solar energy systems, to our “community of customers.”
customer satisfaction activities. Our solar energy systems use the highest qualityhigh-quality solar PV modules from industry-leading manufacturers, including Sharp, SunPower and Kyocera 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 emissions output and reliance upon fossil fuel energy sources. As a 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. During 2018, we received UL certification for POWERHOUSE™ 3.0 and manufactured our initial solar shingles during December 2018. We offer a full selectionanticipate that in the future, the majority of renewable energy productsour revenue will arise from sales of POWERHOUSE™ in-roof solar shingles to local roofing companies, solar installers and sustainable living resources through our nationally distributed catalog and website. Our Solar Living Center in Hopland features interactive demonstrations for renewable energy and environmentally sensible technologies and is the largest facility of its kind, with approximately 2 million visitors since it opened in 1996.homebuilders. Our History
We, are currently a wholly owned subsidiaryincluding our predecessors, have more than 40 years of Gaiam. We were incorporatedexperience in Colorado in 2008 as a successor to a business that began in 1978. Our operations are headquartered in Hopland, California. We acquired Marin Solar in November 2007 and Carlson Solar in January 2008, together representing over $13.8 million of net revenue in 2007 and 1,000 cumulative solar energy system installations. Growth Strategy
Our goal is to continue to build on our industry-leading position and be the largest and most profitable residential solar energy integratorand trace our roots to 1978, when Real Goods Trading Corporation sold the first solar photovoltaic panels in the United States. We intendhave designed and installed over 26,000 residential and commercial solar energy systems since our founding.
We operate as three reportable segments: (1) Solar Division – the installation of solar energy systems for homeowners, including lease financing thereof, and small business commercial in the United States; (2) POWERHOUSE™ - the manufacturing and sales of solar shingles; and (3) Other – corporate operations. On March 27, 2019, our Board of Directors determined to pursueexit its mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with the goal of maximizing future shareholder value. We believe this structure and realignment enables us to effectively manage our operations and resources. As an EPC, 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. As a manufacturer of POWERHOUSE™, we will recognize revenue upon shipment of materials related to customer purchase order fulfillment. During 2018, we established a supply chain to manufacture POWERHOUSE™. We also began building a nationwide network of local roofers and solar installers. We received our first purchase order from a customer on December 27, 2018 and shipped to the customer in January 2019. POWERHOUSE™ License
A material significant event occurred on September 29, 2017, when we executed the License with Dow, providing us an exclusive domestic and international right to commercialize the 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 version was developed with traditional silicon solar cells to increase solar production and to provide a competitive consumer price point. In 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 the TLA allows us to market the POWERHOUSE™ 3.0 product using the Dow name. Under the terms of the License, we will produce, market and sell POWERHOUSE™ 3.0, for which we paid a license fee of $3 million along with a royalty fee equal to 2.5% against net sales of the POWERHOUSE™ product and services, payable quarterly in arrears. Further, we were responsible for all costs to obtain UL certification and we are responsible for the prosecution of all related patents world-wide, which may be offset against the payment of the royalty fee. During December 2018, we began commercialization of POWERHOUSE™ 3.0 entailing the manufacturing, marketing and sale of POWERHOUSE™ 3.0 to roofing companies. As of December 31, 2018, we have invested approximately $3.2 million that has been capitalized to the POWERHOUSE™ License, an intangible asset on the Consolidated Balance Sheet. Other Key Metrics
Backlog
Backlog is discussed below and an important metric as we implement our revenue growth strategy. Key Operational Metric, Gross Margin on Mainland Residential Operations, Currently Our Largest EPC Operating Unit 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 which is 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. Our gross margin percentage on actual installations and with idle time decreased year over year in part due to a greater mix of small commercial projects in 2018 as compared to 2017, as these projects typically have lower margins than our residential installations. Additionally, a majority of indirect labor costs are fixed, which lowers the gross margin % with idle time when there is a decline in revenue as we experienced in 2018 vs. 2017. | | | Twelve Months Ended | | | | | December 31, 2018 | | | December 31, 2017 | | | Gross margin percentage on actual installation time | | | 21 | % | | | 24 | % | | Gross margin percentage including idle time | | | 6 | % | | | 13 | % |
Backlog Backlog represents the dollar amount of revenue that may be recognized in the future from signed contracts to install solar energy systems that have not yet been installed without taking into account possible future cancellations. Backlog is not a measure defined by generally accepted accounting principles 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 received and include anticipated revenues associated with (i) the original contract amounts, and (ii) change orders for which we have received written confirmations from customers. Backlog may not be indicative of future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers. The following strategiestable summarizes changes to achieve this goal:our backlog for our Solar Division for the years ended December 31, 2018 and December 31, 2017: | (in thousands) | | Solar Division | | | Backlog at January 1, 2017 | | $ | 9,375 | | | Bookings from new awards (“Sales”) | | | 26,596 | | | Cancellations and reductions on existing contracts | | | (9,206 | ) | | Amounts recognized in revenue upon installation | | | (14,000 | ) | | Backlog at December 31, 2017 | | | 12,765 | | | Bookings from new awards (“Sales”) | | | 26,744 | | | Cancellations and reductions on existing contracts | | | (12,835 | ) | | Amounts recognized in revenue upon installation | | | (11,017 | ) | | Backlog at December 31, 2018 | | $ | 15,657 | |
We have experienced a high level of contract cancellations, which we attribute to (i) the competitive nature of the solar industry wherein customers shop price after signing a contract and exercise their right to cancel during a three day rescission period after we countersign their contract, (ii) customer home’s physical condition requires upgrades that they may not be able to afford or reduces their return on investment, and (iii) delays to installing their system within their desired timeframe which are often a result of prolonged periods of time to receive local utility approval for installations. We determined that for optimum internal operations, and customer satisfaction, that a backlog equivalent to a few months of sales is optimal. Revenue Growth Strategy Our plans to increase revenue include: | Ø· | Manufacture, market and sell the POWERHOUSE™ 3.0 to roofing companies, solar installers and home builders; |
| Enhance·
| Leverage the POWERHOUSE™ brand to generate leads and leveragerevenue for the Real Goods brand nameSolar Division; |
| · | Leverage our investment in RGS 365™ customer-centric software for the POWERHOUSE™ and Solar Divisions; |
| · | Expand our digital marketing program to increasegenerate customer leads while achieving our market presence. We intenddesired cost of acquisition; |
| · | Make available to enhance and leverage the Real Goods brand name, which we believe is the strongest name in the residentialour customers, additional third-party providers to finance customer acquisitions of our solar energy market,systems; |
| · | Expand our EPC operations to new states; and |
| · | Expand our reputation for outstanding customer service to continue to win business in existing markets and to expand into new markets in which our competitors have little or no brand recognition.network of authorized third-party installers. |
BusinessRecent Developments
On March 27, 2019, our Board of Directors determined to exit our mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with the goal of maximizing future shareholder value. We believe this structure and realignment enables us to effectively manage our operations and resources. This realignment is expected to result in the reduction of workforce payroll plus burden of approximately $4.0 million annually. Revenues and net loss in 2018 for the mainland residential solar business were approximately $8.9 million and $6.3 million, respectively. In order for us to convert our existing backlog to revenue, we plan to use authorized integrators to complete installations throughout the remainder of 2019. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.” The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following to be critical accounting policies whose application have a material impact on our reported results of operations, and which involve a higher degree of complexity, as they require us to make judgments and estimates about matters that are inherently uncertain.
Revenue Recognition Effective January 1, 2018, we have adopted “Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 uncertainty of revenue and cash flows arising from contracts with customers. We have 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. Based on our review of contracts that were not substantially completed on December 31, 2017, there was no impact to the opening retained earnings balance.
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 satisfied our performance obligations to the customer and all revenue recognition criteria are met.
Revenue Recognition – Installation of photovoltaic modules (“PV”) solar systems We use standard contract templates to initiate sales with customers and determined that each project started during the year ended December 31, 2018 contains one performance obligation. Although the contract states multiple services which are capable of being distinct, they are considered a single integrated output to the customer which is customized for each customer. As such all the services promised within a contract are considered one performance obligation. We recognize revenue for installation of PV solar systems over time following the transfer of control to the customer which typically occurs as the PV solar system is being installed. If control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation. The method utilized by us to measure the progress towards completion requires judgment and is based on the products and services provided. We utilize the input method to measure the progress of our contracts because it best depicts the transfer of assets to the customer which incurs as materials are consumed by the project. The input method measures the progress towards completion based on the ratio of costs incurred to date (“actual cost”) to the total estimated costs (“budget”) at completion of performance obligation. Revenue, including estimated fees, are recorded proportionally as costs are incurred. Costs to fulfill include materials, labor and/or subcontractors’ costs, and other direct costs. Indirect costs and costs to procure the panels, inverters, and other system miscellaneous costs needed to satisfy the performance obligation are excluded since the customer does not gain control of those items until delivered to the site. Including the costs of those items would overstate the extent of our performance. Each project’s transaction price is included within the contract and although there is only one performance obligation, changes to the contract price could take place after fulfillment of the performance obligation. We have considered financing components on projects started during the year ended December 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 are expected to be received within one year from project completion and there were no adjustments to the contract values. Under ASC 606, we are required to recognize as an asset the incremental costs of obtaining a contract with a customer if those costs are expected to be recovered. We incur sales commissions that otherwise would not have been incurred if the contract had not been obtained. These costs are recoverable; however, we have elected the use of a practical expedient to expense these costs as incurred as the amortization period of the asset would be less than one year.
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. These services are treated as stand-ready performance obligations and are satisfied evenly over the length of the agreement, so we have elected a time-based method to measure progress and recorded revenue using a straight-line method.
Revenue Recognition – Service & Warranty Warranties for workmanship and roof penetration are included within each contract. These warranties cannot be purchased separately from the related services, are intended to safeguard the customer against workmanship defects and does not provide any incremental service to the customer. It is necessary for us to perform the specified tasks to provide assurance that the final product complies with agreed-upon specifications and likely do not give rise to a separate performance obligation. We will continue to account for any related warranties in accordance with ASC 460-10 and record an accrual for potential warranty costs at the completion of a project. Any services provided to a customer outside of warranties such as system inspections are recognized upon completion of the service. Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate anticipated losses based on the expected collectability of all of our accounts receivable, which takes into account collection history, the number of days past due, identification of specific customer exposure and current economic trends. When we determine a balance is uncollectible and no longer actively pursue collection of the account, it is written off. Inventory Inventory for our Solar Division segments consists primarily of solar energy system components (such as photovoltaic modules and inverters) located at our warehouses and is stated at the lower of cost (first-in, first-out method) or net realizable value. We identify the inventory items to be written down for obsolescence based on the item’s current sales status and condition. We write down discontinued or slow-moving inventories based on an estimate of the markdown to retail price needed to sell through our current stock level of the inventories on a quarterly basis. POWERHOUSE™ inventories are recorded at the lower of cost (incurred from third party supply channel manufacturers) or net realizable value. Cost is determined using the first-in, first-out method. Management will establish an estimated excess and obsolete inventory reserve based on slow-moving and obsolete inventory. At December 31, 2018, there was no excess and obsolete inventory reserve.
Warranties Currently, our standard manufacturing warranty for our POWERHOUSE™ solar shingle comes with a 11-year product warranty, which is the standard product warranty of most traditional solar panels today, and a 24-year power production warranty. We receive warranties from our supply chain matching the terms of the POWERHOUSE™ solar shingle warranty. We warrant our EPC 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 typically passed through to the customers, typically have product warranty periods of 10 years and a limited performance warranty period of 25 years. We generally provide for the estimated cost of warranties at the time the related revenue is recognized. We also maintain specific warranty liabilities for large commercial customers. We assess the accrued warranty reserve regularly and adjust the amounts as necessary based on actual experience and changes in future estimates.
Goodwill and Purchased Intangibles We review goodwill for impairment annually during the second quarter, or more frequently if a triggering event occurs between impairment testing dates. As a result of the annual impairment test, we fully impaired the goodwill balance charging an impairment loss to the consolidated statement of operations during the second quarter of 2018. Up-front POWERHOUSE™ 3.0 license payments when incurred, costs to obtain UL certification and legal costs to acquire the License are initially capitalized and thereafter amortized to operations, commencing November 2018 after UL certification, on a straight-line basis over the expected life of the License through 2034.
Common Stock Warrants We account for common stock warrants in accordance with applicable accounting guidance provided in FASB ASC 480,Liabilities – Distinguishing Liabilities from Equity, as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Certain of our warrants are accounted for as liabilities due to provisions either allowing the warrant holder to request redemption, at the intrinsic value of the warrant, upon a change of control, event of default or failure to deliver shares. We classify these warrant liabilities on the Condensed Consolidated Balance Sheet as current or long-term liabilities based on their expiration date. They are revalued at each balance sheet date after their initial issuance with changes in the value recorded in earnings. The Company used a Monte Carlo pricing model to value these warrant liabilities. The Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. The assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 to value the common stock warrant liabilities are as follows: | | | | | | | | | Closing | | | | | | | | | Market | | | Remaining | | | | | Exercise | | | | | | Market Price | | | Risk-free | | | Dividend | | | Price | | | Term | | | | | Price | | | Strike Floor | | | (average) | | | Rate | | | Yield | | | Volatility | | | (years) | | | Warrant Liability April 09, 2018 | | $ | 1.12 | | | $ | 0.97 | | | $ | 0.85 | | | | 2.60 | % | | | 0.00 | % | | | 120 | % | | | 5.00 | | | Warrant Liability June 30, 2018 | | $ | 0.55 | | | $ | 0.19 | | | $ | 0.57 | | | | 2.72 | % | | | 0.00 | % | | | 115 | % | | | 4.78 | | | Warrant Liability September 30, 2018 | | $ | 0.32 | | | $ | 0.19 | | | $ | 0.39 | | | | 2.93 | % | | | 0.00 | % | | | 115 | % | | | 4.53 | | | Warrant Liability December 31, 2018 | | $ | 0.32 | | | | N/a | | | $ | 0.52 | | | | 2.49 | % | | | 0.00 | % | | | 120 | % | | | 4.28 | |
The Company also holds common stock warrants which have been classified in equity. Upon conversion of the warrants, the Company determines the fair value of the warrants exercised using the share price and records the impact to common stock and additional paid-in capital.
Derivatives The 2018 Notes contained conversion features which have been accounted for in accordance with FASB ASC 815,Derivatives and Hedging. The conversion options were embedded within the 2018 Notes but have been separated as (i) their economic characteristics and risks did not clearly and closely relate to the 2018 Notes (ii) the 2018 Notes were not remeasured at fair value and (iii) a separate instrument with the same terms as the conversion options would be considered a derivative. The 2018 Notes also contained various redemption clauses (contingent) that met all the criteria of a derivative and were measured and recorded at fair value at the date of issuance and were revalued at each balance sheet date with changes in the value recorded in earnings. We used a Lattice pricing model to value these derivative liabilities. The Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires us to develop its own assumptions. We classified these derivative liabilities on the Condensed Consolidated Balance Sheet as short-term liabilities since they had maturities of one year. When the conversion option was exercised, for accounting purposes both liabilities (i.e., the debt host and the separated derivative liability) were subject to extinguishment accounting. As such, a gain or loss upon extinguishment of the two liabilities equal to the difference between the recorded value of the liabilities and the fair value of the consideration issued to extinguish them was recorded. The assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 to value the derivative liabilities are as follows: | | | | | | Closing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market | | | | | | | | | Market | | | Remaining | | | | | | | | | First | | | Second | | | | | Conversion | | | Price | | | Risk-free | | | Dividend | | | Price | | | Term | | | Debt | | | Soft Call | | | Redemption | | | Redemption | | | | | Price | | | (average) | | | Rate | | | Yield | | | Volatility | | | (years) | | | Yield | | | Threshold | | | Period | | | Period | | | Derivative Liability April 09, 2018 | | $ | 1.26 | | | $ | 0.85 | | | | 2.08 | % | | | 0.00 | % | | | 110 | % | | | 1.00 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability June 30, 2018 | | $ | 0.55 | | | $ | 0.57 | | | | 2.23 | % | | | 0.00 | % | | | 130 | % | | | 0.78 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability September 30, 2018 | | $ | 0.31 | | | $ | 0.39 | | | | 2.36 | % | | | 0.00 | % | | | 125 | % | | | 0.53 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability December 31, 2018 | | $ | 0.31 | | | $ | 0.52 | | | | 2.45 | % | | | 0.00 | % | | | 90 | % | | | 0.28 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % |
Share-Based Compensation We recognize compensation expense for share-based awards based on the estimated fair value of the award on the date of grant. We measure compensation cost at the grant date fair value of the award and recognize compensation expense based on the probable attainment of a specified performance condition for performance-based awards or over a service period for time-based awards. We use the Black-Scholes option valuation model to estimate the fair value for purposes of accounting and disclosures. In estimating this fair value, certain assumptions are used (see Note 11. Share-Based Compensation in Item 8 of the Financial Statements in this prospectus), including the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of different estimates for any one of these assumptions could have a material impact on the amount of reported compensation expense. Expected volatilities were based on a value calculated using the historical stock price volatility. Expected life was based on the specific vesting terms of the option and anticipated changes to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model was based on U.S. Treasury zero-coupon securities with remaining terms similar to the expected term on the options. RGS does not anticipate paying any cash dividends on its Common Stock in the foreseeable future and, therefore, an expected dividend yield of zero was used in the option valuation model. The assumptions used to value to 2018 Options as of December 31, 2018 are as follows: | 2018 Non-Qualified Stock Options | | | | | | | | | | | | | | | | | | | Expected | | | | | | Market | | | | | Vesting | | Expected | | Dividend | | | Risk-free | | | Price | | | Grant Date | | Period | | Life | | Rate | | | Rate | | | Volatility | | | June 21, 2018 | | 2.78 years | | 4.2 years | | | 0 | % | | | 2.70 | % | | | 148.77 | % | | September 4, 2018 | | 2.82 years | | 5.7 years | | | 0 | % | | | 2.78 | % | | | 147.40 | % | | September 10, 2018 | | 2.81 years | | 5.7 years | | | 0 | % | | | 2.83 | % | | | 146.66 | % | | October 15, 2018 | | 2.96 years | | 4.3 years | | | 0 | % | | | 2.96 | % | | | 149.82 | % | | October 29, 2018 | | 2.92 years | | 4.3 years | | | 0 | % | | | 2.87 | % | | | 150.34 | % |
Income Taxes We recognize income taxes under the asset and liability method. Deferred income taxes are recognized based on temporary differences between financial reporting and income tax bases of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss carry-forward prior to its expiration, is more likely than not. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the appropriate valuation allowance, we consider projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies, and our overall deferred tax position.
Results of Operations
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
POWERHOUSE™ Segment:
We received our first purchase order from a customer on December 27, 2018 and shipped to the customer in January 2019. Accordingly, we have no revenue during 2018 from POWERHOUSE™ and a backlog of one transaction. We commenced amortization of the POWERHOUSE™ license upon receiving UL approval on November 2, 2018 and have recorded two months of amortization expense of $0.03 million. Solar Division Segments: Contract revenue:
Sale and installation of solar energy systems. Sale and installation of solar energy system revenue decreased $2.5 million, or 17.9%, to $11.5 million during the twelve months ended December 31, 2018, from $14.0 million during the twelve months ended December 31, 2017. During the twelve months ended December 31, 2018, installations decreased 0.5 megawatts to 2.8 as compared to the 3.3 megawatts installed during the twelve months ended December 31, 2017. This decrease was primarily due to slower sales in the beginning of the year and a decline in our weighted average selling price per watt of 2.6%. Additionally, limitations including cutbacks of major incentive programs in Massachusetts and Rhode Island caused delays in the installation of our backlog in the fourth quarter of 2018 as approvals required for installation were not available. This delayed the installation of many projects in the fourth quarter, as Massachusetts and Rhode Island comprised a significant portion of our backlog in 2018. As previously disclosed, we are exiting our Mainland residential solar business.
Contract expenses:
Installation of solar energy systems. Installation of solar energy system expenses decreased $1.9 million, or 14.5%, to $11.2 million during the twelve months ended December 31, 2018, from $13.1 million during the twelve months ended December 31, 2017, which corresponds to the reduction of installation revenue during this same time comparison. We utilize gross margin percentage to measure performance utilizing an internal time reporting system allowing us to measure both total incurred contract expense and contract expense excluding construction crew idle time. For the twelve months ended December 31, 2018, our residential segments gross margin without idle time declined due to a 2.6% decline in the average selling price per watt exceeding the 0.8% decline in the costs of installation per watt. Customer acquisition.Customer acquisition expense decreased $2.3 million during the twelve months ended December 31, 2018, or 38.9%, to $3.6 million from $5.9 million during the twelve months ended December 31, 2017. This decrease is primarily attributable to a reduction in workforce related to a targeted focus on increasing individual sales team member key performance indicators and a more selective hiring process allowed for significant improvements in lead performance. Our continued efforts to refine our digital lead development also played a large role in the decrease. Operating expense: Operating expenses decreased $1.0 million, or 9.2%, to $9.8 million during the twelve months ended December 31, 2018 compared to $10.8 million during the twelve months ended December 31, 2017, primarily due to a decrease in labor and legal fees. Other Segment:
Goodwill impairment. Goodwill impairment increased by $1.3 million during the year ended December 31, 2018 due to the results of our annual impairment testing. We concluded that the fair value of the goodwill no longer exceeded its carrying value and wrote off the goodwill balance.
Litigation and proxy contest expense.Litigation and proxy contest expenses during the twelve months ended December 31, 2018 was $0.2 million compared to $1.5 million during the twelve months ended December 31, 2017. The decrease of $1.3 million is primarily attributable to nonrecurring proxy contest expenses of $1.2 million in 2017. Our legal expenses may increase in subsequent periods. See Note 7. Commitments and Contingencies. Change in fair value of derivative liabilities, loss on debt extinguishment and amortization of debt discount & deferred loan costs. The issuance of the 2018 Notes, subsequent conversions and revaluation of the derivative liabilities resulted in our recording derivative liabilities as disclosed in Note 9. Convertible Debt. Additionally, interest expense increased due to the accretion of the debt discount and deferred loan costs related to the 2018 Notes. No such transaction occurred during the year ended December 31, 2017.
Other (income) expenses. Other expenses primarily represent a gain on settlement of a long-term liability with a directors and officers liability insurance provider.
Liquidity and Capital Resources
Our historical operating results indicate substantial doubt exists related to our ability to continue as a going concern. Management’s plans and actions, which are intended to mitigate the substantial doubt raised by our historical operating results in order to satisfy our estimated liquidity needs for a period of 12 months from the issuance of the consolidated financial statements, are discussed below. As we cannot predict, with certainty, the outcome of our actions to generate liquidity, or whether such actions would generate the expected liquidity as currently planned, management’s plans to mitigate the risk and extend cash resources through the evaluation period, are not considered probable under current accounting standards for assessing an entity’s ability to continue as a going concern. As of December 31, 2018, we have cash of $5.8 million, working capital of $6.9 million, debt of $0.3 million and shareholders’ equity of $10.8 million. We have experienced recurring operating losses and negative cash flow from operations which have necessitated: | Ø· | Exiting the mainland residential division and execution of a reduction in workforce, see Note 16. Subsequent Events; |
| Expand into markets in which legislation·
| Focusing on growing POWERHOUSE™ revenue through a re-allocation of personnel to POWERHOUSE™ sales and government incentives are favorableinitiating sales to other solar installers and distribution companies; and |
| · | Raising additional capital. See Note 8. Shareholders Equity and Note 16. Subsequent Events for solar energy. We plantransactions to expandraise capital during the geographic scopesecond quarter of our business as jurisdictions adopt new or improve existing incentive programs that enhance the economics of solar energy systems for a broader customer base. In addition to the $3.4 billion California Solar Initiative, or CSI, adopted in 2007, 29 states, including Arizona, Colorado, Connecticut, Hawaii, Massachusetts, Nevada, New Jersey and New York, have adopted legislation and incentives favorable to solar energy and other states are considering adopting such legislation and incentives.2019. |
| Ø | | Consolidate the fragmented U.S. solar energy system installation market. The U.S. solar energy system installation market remains highly fragmented, with over 300 independent installers or integrators in California alone. We intend to continue our consolidation activities in order to penetrate new markets, expand our business and further enhance our national brand and leverage our national marketing programs. We plan to create economies of scale through our consolidation activities in order to increase our operating efficiencies, with a goal of improving our margins and profitability.
No assurances can be given that we will be successful with our plans to grow revenue for profitable operations. |
| Ø | | Expand our “community of customers” to enhance revenue and lower our customer acquisition costs.We intend to leverage the reputation for authenticity associated with our Real Goods brand to expand our “community of customers,” which cares deeply about solar energy and a renewable energy lifestyle and views us as the premier provider of products, services and support to enable this lifestyle. We plan to cross-market our wide array of energy-saving and carbon footprint-reducing products and services in addition to our solar energy systems, which we believe will enhance our revenue and create additional customer loyalty. We also intend to leverage our customer base to continue to provide us with new leads and referrals, which, in conjunction with our cross-marketing efforts, should allow us to continue to lower our customer acquisition costs.
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| Ø
| | Make a difference in the world. We intend to promote our solar energy systems and sustainable living resources as a way for individuals and communities to reduce their carbon footprint, eliminate U.S. dependence on foreign and fossil fuel-based energy sources and foster a culture of respect for the Earth and its natural resources for the benefit of future generations. We estimate the energy savings resulting from our products that were purchased in the 1990s will prevent the production of over one billion pounds of carbon dioxide over the life of those products, which is the equivalent of removing approximately 100,000 passenger cars from use for one year. We anticipate that products we expect to sell through 2010 will prevent an additional one billion pounds of carbon dioxide from being released into the atmosphere.
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Competitive Advantages
We have historically incurred a cash outflow from our operations as our revenue has not been at a level for profitable operations. As discussed above, a key component of our revenue growth strategy is the sale of our POWERHOUSE™ 3.0 in-roof solar shingle. We obtained UL certification for POWERHOUSE™ at the close of 2018 and therefore only recently begun to market POWERHOUSE™ at the start of 2019. We believe that we will require several quarters for us to generate sales to meet our goals for profitable operations. The first quarter of the year has always been one of our slowest sales periods and as such, this is a period of higher cash outflow. POWERHOUSE™ 3.0 sales during the first quarter of 2019 have been materially less than our expectations and, accordingly, we raised additional capital during the second quarter of 2019. Additionally, we have arranged with a numberthird-party specialty lender to provide financing to our POWERHOUSE™ roofers for their purchases of advantages overPOWERHOUSE™ in-roof shingles. Under this agreement, we are to be paid the next day after the roofers place a purchase order and, accordingly, when roofers avail themselves of this financing, we do not have accounts receivable, enhancing our competitors, includingcash flow from operations. As discussed above, (i) we expect that future sales of POWERHOUSE™ 3.0 in-roof solar shingles will be our primary source of revenue and (ii) we only recently began marketing POWERHOUSE™ 3.0, and accordingly, we expect to incur a quarterly cash outflow for a portion of 2019. We have placed purchase orders with our supply chain partners for inventory to be converted to revenue. The Company has prepared its business plan for the ensuing twelve months, which includes the following: | Ø· | Exit from the mainland residential division which historically has generated material cash outflows; |
| Brand recognition·
| Generate POWERHOUSE™ revenue through sales to local roofing companies, home builders and authenticity. We believe we are recognized asEPC companies; |
| · | Convert current mainland residential backlog into revenue through authorized third-party integrators; and |
| · | Increase sales and installations with commercial customers on the originalmainland and most experienced solar energy integrator. Our founder’s reference guide, the “Solar Living Sourcebook,” has sold approximately 250,000 copies. In addition, we believe that our customers often buy our solar energysales and installations of residential and commercial systems because of the strength of the Real Goods brand, our longevity in the marketplace and our reputation for excellent customer service. As a result of our 30 years of operating in the solar energy industry, we believe that we are frequently the first company in the industry approached by new solar companies with innovative products.Hawaii. |
| | Ø52 | | Strength of management. We have a highly experienced management team. Our founder and Chief Executive Officer, John Schaeffer, has more than 30 years of experience in the solar energy industry. In addition, our Chairman, Jirka Rysavy, founded and grew Corporate Express from $30 million to $3 billion in revenue in less than five years. Mr. Rysavy and other members of our management team have considerable experience in the consolidation of fragmented industries, having acquired over 250 companies.
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| Ø | | Low-cost customer acquisition model. Our business model gives us a unique cross-marketing advantage by providing us access to potential purchasers of solar energy systems through our catalog and Internet sales, from visitors to our Solar Living Center and from Gaiam’s 8 million direct customers. In addition, our strong brand name and reputation for outstanding customer service provide us with word-of-mouth referrals.
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| Ø | | Relationship with Gaiam. We believe that our relationship with Gaiam provides us with additional expertise across brand building, marketing, acquisition completion and integration and certain administrative functions, which should enable us to operate more efficiently and cost-effectively.
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| Ø | | Strong supplier base. We maintain strong relationships with many leading solar PV module manufacturers, including Sharp, SunPower and Kyocera Solar, which provides us with continued access to a supply of our key systems products and early review of innovative market products. Our ability to purchase directly from these manufacturers lowers our purchasing costs relative to those of our competitors that purchase through third-party distributors.
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| Ø | | Strong balance sheet and gross margins. Immediately after the completion of this offering, after application of the net proceeds of this offering, we will have $ million of cash and no outstanding debt. In addition, we have historically generated what we believe to be industry-leading gross margins. We believe that our strong balance sheet and our financial strength meaningfully differentiate us from our competitors, providing our suppliers and customers with confidence in our financial strength and longevity, and further supporting our consolidation strategy.
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Industry Overview
We believe that as demand for electric power increases, the electric power industry will face various challenges, including the
following:
| Ø | | Power industry at peak capacity with aging infrastructure. A majority of U.S. power plants in highly populated areas approach capacity during times of peak usage. Additionally, over half of U.S. power plants are more than 30 years old. In order to meet the rising demand for electric power, additional plants will need to be constructed and the aging existing plant infrastructure will require significant capital investment.
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| Ø | | Finite resources. Non-renewable energy resources are finite. Although coal, the largest non-renewable energy resource, is estimated to have over 100 years of reserves left, the rate of global energy consumption is expected to continue to increase, jeopardizing economical access to sufficient energy supply for future generations if renewable energy sources are not developed.
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| Ø | | Increased electricity rates. As a result of aging infrastructure and high energy demand, residential and commercial customers are facing rising electricity rates, creating economic pressures for consumers and businesses alike.
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| Ø | | Pollution concerns and climate change. Non-renewable, fossil fuel-based energy sources, including coal, create environmental pollution, and there is significant local resistance to new coal-fired power plants in populated areas. Concerns about global warming and greenhouse gas emissions have resulted in international efforts to reduce such emissions, and various states have enacted stricter emissions control laws or mandated that utilities comply with renewable portfolio standards, or RPS, which require the generation of a certain amount of power from renewable sources.
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Because the solar energy industry offers solutions to these challenges, we believe it has extremely large growth potential. Currently, only approximately one-tenth of one percent of the world’s power is generated from solar energy sources. Between
2000 and 2006, manufacturers’ shipments of solar PV modules have increased at a compound annual growth rate of 41%,
according to Navigant Consulting. The global solar energy market is estimated to grow to between $19 billion and $32 billion
Business
by 2011, with annual solar energy installations reaching between 4.2 and 7.6 gigawatts, or GW, by 2011, compared to 1.7 GW in 2006, according to Solarbuzz.
Drivers of Solar Energy Industry Growth
We expect a number of factors will contribute to growth in the solar energy industry, including the following:
| Ø | | Legislative initiatives. A number of initiatives have been enacted by the federal government and various states, municipalities and utilities that encourage or require the installation of grid-tied solar energy systems. In 1996, the state of California enabled individual energy systems to tie into the conventional utility grid and began to require that various rebates and incentives be provided to support the use of solar energy systems, making California the focus for the development of the solar energy market in the United States. By 2006, California had approximately 24,000 installed residential solar energy systems and accounted for approximately two-thirds of the U.S. residential market for solar energy systems. California is now the third largest market for solar energy behind Germany and Japan. The CSI provides for the expenditure of up to $3.4 billion in incentives for installation of solar energy systems with generation capacity of 3 GW of electricity by 2017. California has also mandated an increase in the percentage of renewable energy retail sales by certain utilities by at least 1% per year to reach at least 20% by the end of 2010, with a goal of 33% by 2020. Colorado has enacted an RPS of 20% for investor-owned utilities and 10% for electric cooperatives and municipal utilities serving more than 40,000 customers by 2020. In some jurisdictions, such as Colorado, operation of a solar energy system that is located on the property of a utility customer can satisfy a portion of the utility’s RPS requirements.
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| Ø | | Financial incentives. As these RPS programs are implemented, it is common for financial incentives to be required, making the purchase of solar energy systems more affordable and opening additional solar markets in the United States.
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| ¡ | | Rebates. Rebates offered to customers or integrators reduce the initial cost of solar energy systems. Several states, including California and Colorado, require certain utilities to offer rebates that can substantially reduce the costs of installing solar energy systems. California’s residential rebate is currently $2.20 to $2.50 per watt, and Colorado currently offers a total effective rebate of up to $4.50 per watt. These rebates typically reduce the customer’s out-of-pocket cost for purchasing a solar energy system by 20% to 50%.
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| ¡ | | Tax credits. There is currently a 30% federal tax credit with a $2,000 cap for residential solar energy systems and a 30% federal tax credit with no cap for commercial solar energy systems. The credit for residential systems is currently set to expire on December 31, 2008, and the credit for commercial systems is currently set to be reduced to 10% on January 1, 2009, unless extended.
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| ¡ | | Other incentives. Other incentives, such as net metering, time-of-use credits and performance-based incentives, are provided to consumers based on the amount of electricity their solar energy systems generate. Currently, 38 states have required certain utility providers to accept net metering, and four additional states have partial net metering administered by individual utilities within such states. Net metering allows residential and small-scale commercial solar energy producers to sell excess power generated by their systems to their utility companies, through existing electric meters, at standard retail prices. Time-of-use metering allows customers to sell solar power to their utility for very high rates during peak times when traditional loads are at their highest demand. These customers can then buy back electricity from the utilities during other times at a much lower rate, providing them an additional financial benefit. Performance-based incentives, or PBIs, reward customers based on the output of their solar energy system over time, as opposed to through an initial rebate. The CSI currently requires that residential customers who choose not to accept the purchase rebate be provided a PBI of $0.34 to $0.39 per kilowatt-hour, or kWh, for a period of five years. This PBI amount declines in steps as the aggregate number of residential solar energy systems increases.
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| ¡ | | Renewable energy credits. In many states, the installation of a solar energy system generates a renewable energy credit, or REC, which is marketable in certain states. These RECs are of little value in the hands of individual solar energy system owners because of the limited market for RECs and the associated transaction costs, which are high relative to the value of RECs typically available to an individual residential user. In most cases, we will retain the RECs that result from our integration projects, and we expect additional revenues may be generated from the sale of these aggregated RECs in the future if a market for RECs develops.
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| ¡ | | Property tax exemptions. In certain jurisdictions, such as California, the assessor is prohibited from increasing a solar energy system owner’s property tax assessment as a result of the added value of qualified solar energy systems, which we provide.
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| Ø | | Benefits of solar energy systems.Solar energy as a source of electrical power offers the following benefits compared to conventional energy sources:
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| ¡ | | Lower energy prices. The cost of electricity generated by a solar energy system is essentially fixed at the time of installation, providing a hedge against utility electricity price increases and inflation. According to the U.S. Energy Information Administration, average retail prices for electricity in the United States increased by 9.3% from 2005 to 2006. We believe that the monthly savings resulting from the solar power produced by an average 4 kW residential solar energy system in California is approximately $100. Solar energy systems generate much of their electricity during the afternoon when the sun’s rays are strongest and when the greatest demand for electricity occurs. Customers can use their solar energy systems’ energy to replace peak time conventional electricity, which can be more expensive and less reliable than electricity purchased during non-peak times. In addition, solar energy systems typically have low operating expense because they require minimal maintenance over their expected lives.
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| ¡ | | Versatility and ease of installation. Solar energy systems can generate electricity in any location that receives sunlight, while relatively few locations have both the infrastructure and natural resources required to support other forms of renewable energy, including hydroelectric, wind and geothermal. Solar energy systems can be installed directly at sites where power is needed, reducing conventional electrical transmission and distribution costs.
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| ¡ | | Security. The use of solar energy systems improves energy security by reducing fossil fuel purchases from hostile or politically or economically unstable countries and by reducing power strains on local electrical transmission and distribution systems.
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Challenges to the Solar Energy Industry
We believe growth in the solar energy industry faces the following challenges:
| Ø | | Customer economics and financing. The decision to install a solar energy system represents a significant investment of approximately $15,000 to $30,000 (net of rebates and federal tax credits) for the typical home in California and $10,000 to $20,000 (net of rebates and federal tax credits) for the typical home in Colorado. In addition, financing sources for solar energy systems are currently limited. The return on each customer’s investment in a solar energy system will occur over a different period or at a different rate depending upon individual circumstances. A potential purchaser has to weigh the initial investment decision against the longer-term utility cost reductions, increased property value and low system maintenance costs provided by a solar energy system. The installation cost of a residential solar energy system purchased from us typically ranges from $8.00 to $9.00 per AC watt based on total system cost before rebates or incentives.
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| Ø | | Evolving regulatory landscape. The solar energy industry is significantly driven by federal, state and local regulations and incentives, which are continually changing. Changes in regulations and incentives could adversely affect the economic viability of solar energy systems.
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| Ø | | Supply of solar PV modules. The manufacture of solar PV modules depends on the availability of silicon, an essential raw material. Currently, there is a global shortage of silicon, which has resulted in some price increases and limited availability for solar PV modules. This shortage is likely to continue in the short term and could negatively impact the industry.
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Services
We are an integrator of solar energy systems that meet each customer’s unique needs and circumstances. We offer turnkey integrator services to our customers, including the design, procurement, installation, grid connection, monitoring, maintenance and referrals for third-party financing of solar energy systems. We install residential and small commercial systems that are generally between 1 kW and 500 kW output, with the average residential installation being approximately 4 kW output. At the outset of a potential sale, we provide our customers a full analysis of the efficiency and design as well as the financial aspects and potential return on investment of the proposed system. Using our analytical tools, our sales representatives assist customers in determining their specific solar energy system needs and their site’s solar energy generating potential. We also identify the relevant federal, state and local regulations that are important to the cost, operation and return on investment of the customer’s solar energy system, as well as relevant tax and utility rates and various other factors. By using these tools, we are able to maximize the compatibility of our product offerings to our customers and provide consistent pricing and return on investment estimates.
Our design and engineering professionals then design the solar energy system, and our administrative rebate specialists prepare and submit all permit and rebate applications for our customers. As soon as the building permit is approved, our installation professionals begin the installation by placing metal racking on the customer’s roof (or by building a ground mount if indicated), followed by installation of the solar PV modules, inverter(s) and the balance of systems components and safety equipment.
After the solar PV modules and inverter(s) are installed on the customer’s home or business, we obtain a final inspection of the installation by the local building department, submit final rebate information to the appropriate rebating jurisdiction and at the same time apply for the local utility company to interconnect the customer’s solar energy system to the utility grid. The entire process from signing of the contact through final inspection by the local building department typically takes between 30 to 60 days, with the actual installation work usually requiring two to three days.
For purchases of a solar energy system, we typically require a deposit upon execution of the purchase contract, payment of 50% of the balance upon delivery of materials and the balance upon project completion. The price we invoice customers for solar energy systems is net of any available incentive or rebate which is assigned to us and which we then process and collect.
Solar Energy Systems A basic
The most visible component of solar energy systems are the solar shingles or photovoltaic modules with metal racking which transforms the sunlight into direct electrical current (“DC”), which then travels to the inverter. The inverter converts the DC electricity into useable alternating current that matches the current of the household electrical service and the utility grid. Other major components include the monitoring system has no movingwhich tracks the solar production of the system, and balance of system which includes mechanical and electrical parts. The electricity created can go onto the grid or be used by the customer to power household items such as lights and appliances. For customers who would like to have electrical black out protection or who want to strategically manage their electrical usage, we provide battery solutions that integrate with our solar energy systems. POWERHOUSE™: Our product is a built-in photovoltaic array (“BIPV”), also known as a solar shingle. The solar shingle is a building material that once installed becomes the roof structure. The BIPV is the equivalent of the photovoltaic module and racking of a traditional solar energy installation. We do not install these systems. Instead, we manufacture the solar shingle for distribution to our targeted customers. Solar Division: The Solar Division sells and installs traditional modules and racking photovoltaic solar energy systems. We do not manufacture any of these components. We purchase all components from the manufacturer or their distributors. Warranty Terms
POWERHOUSE™: We issue a manufacturer’s warranty on POWERHOUSE™ solar shingles, equal to the third-party manufacturer terms we secure. Workmanship warranty will be provided by the installer. Our new home builder and roofer network, when applicable, will submit to us a return merchandise authorization (“RMA”) for defective components. We will authorize the RMA and transfer substitute POWERHOUSE™ component(s) to the customer who will return a like number of defective components. We will similarly execute a RMA with the appropriate manufacturer. Solar Division: We and our suppliers offer warranties of up to 10 years for parts and consistslabor, including property damage arising from workmanship, excluding roof penetrations which are generally warrantied for a period of 5 years. All major components installed in a number ofphotovoltaic system array are covered under transferable manufacturers’ warranties, which generally range from 10 to 25 years. Customer claims are processed through our customer service department. We will provide reasonable assistance to our customers in contacting the manufacturer concerning warranty service and undertake reasonable effort to recoup our labor costs from the manufacturer.
Financing We make available to our POWERHOUSE™ local roofing company customers a business-to-business lender to finance their purchases from us. We offer our Solar Division customers a choice to finance their solar PV modules wired togethersystems with their cash, third-party loans, or third-party leases or power purchase agreements. We are constantly vetting new financing products and mounted on a metal framing structure, an inverter andonly refer the balance of systems and safety equipment necessary to connect the system toones that fit the customer’s existing utility service.needs and desires. Our menu of finance offerings allows us to provide solar energy systems to our customers with financing terms that we believe are economically attractive for their individual situation. Sales and Marketing Our targeted customers for our POWERHOUSE™ in-roof solar shingle include (i) homeowners, (ii) local roofing companies, (iii) solar installation companies, (iv) custom homebuilders and (v) mass market homebuilders. We utilize our call center to contact customers in our geographic markets. We offer additional services, such as marketing support, referrals and on-site training to roofing companies that complete our requirements for becoming a POWERHOUSE™ Professional. We have and plan to continue to make marketing expenditures to develop brand name recognition for POWERHOUSE™. Our marketing has to-date included digital marketing, attendance at trade shows and expos, and we have arranged for television presentations. In the Solar Division, we have trained our residential and commercial sales organization to effectively engage prospective customers from initial interest to customized proposals to signed contracts. As previously disclosed, we are exiting our Mainland residential solar business. We intend to continue to educate consumers about the benefits of our solar products in order to lower our customer acquisition costs and further expand the market opportunity. | | Ø• | | Solar PV modulesInside sales–. We source solar PV modules from three main manufacturers: Sharp, SunPower and Kyocera Solar. These modules range in conversion efficiency from 12% Our inside sales groups initially engage with potential customers prior to 19%. Solar PV modules can be manufactured using different semiconductor materials, including mono- and poly-crystalline silicon, amorphous silicon, gallium arsenide, copper indium gallium selenide,our outside sales or CIGS, and cadmium telluride. Developmentse-sales teams’ customer engagement. Inside sales groups identify each potential customer’s initial interest in solar PV technology have generated advances inenergy and compile data necessary to assess potential cost savings for subsequent discussion with the conversion efficiency of solar PV cells, reductions in manufacturing costs and improvements in manufacturing yields.potential customer by the sales teams.
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| | • | ØDirect outside sales– We employ an outside commercial sales force in the east coast markets and Hawaii to generate new business and complete sales orders. Effective March 1, 2018, we completed a realignment of our sales teams resulting in the elimination of our east coast residential sales force. |
| | • | InvertersCustomer referrals –. An inverter Our customer referral program is an electronic device that converts the low-voltage DC power that is generated by solar PV modules to conventional 120-volt AC power that is used by standard household lights and appliances. While an inverter may needdesigned to be replaced approximately 15 years after installation, other system components typically do not require replacement during the 20-an effective and efficient method of reaching new customers. Our program provides cash incentives to 25-year warranty period applicablecurrent customers to solar PV modules. Individual solar energy systems are connected to the utility grid by an inverter, which also allows the excess electricity produced to flow into the grid, causing the customer’s electric meter effectively to run backwards, to the credit of the customer’s utility account at standard retail prices. A customer that has a grid-connected solar energy system draws energy from the grid through the conventional local utility when the sun is not shining, or when household energy consumption exceeds the solar energy system’s energy generation capacity.refer friends, relatives and co-workers. |
Typical Grid-Tied Residential Solar Energy System Installation
Warranty Terms
Most manufacturers of solar PV modules currently offer a 20- to 25-year transferable warranty of their products. We offer a 10-year parts and labor warranty in California and a five-year parts and labor warranty in Colorado.
Financing
While a majority of our customers choose to purchase their solar energy systems without the use of financing, we connect our customers with preferred third-party financing sources as requested. We handle some of the administrative processing for our customers that choose to use third-party financing.
| • | Online Digital Marketing– Consumers seek online education, purchase options, and business reviews before determining the best provider to meet their needs. To align our business with marketplace, and our sales teams with the consumer, we continue to expand our online market presence. |
BusinessCustomers
SalesPOWERHOUSE™: Our customers will include homeowners, new homebuilders, engineering, procurement and Marketing
Our conventional marketing program includes presentation booths at tradeshowsconstruction (“EPC”) solar companies and consumer shows, inserts or an advertising pageroofers in our catalogs, of which we distribute more than 1.6the re-roof market. We estimate there are approximately 7 million copiesre-roofs and new home construction annually postcard mailings to targeted consumer markets (including portions of Gaiam’s 8 million customer base), Internet search engine optimization, pay-per-click ad words, affiliate marketing programs, radio advertising and customer referral programs.
To enhance our solar energy integration business and promote our brand awareness, we operate complementary direct-to-consumer operations that generate solar energy system purchaser leads. We maintain a mail order catalog and a website. Our mail order catalog and website also provide pricing tools, media programming, in-depth articles and product information as well as how-to instructional content. Our customer service staff is trained in cross-selling all of our products, including solar energy systems, and they help us achieve a full integration of our cross-marketing efforts. We also receive new customer leads from the referrals of our satisfied customers, through our customer rewards and affinity programs, from designers and architects with whom we have worked on previous projects and through the strength and longevity of our Real Goods brand name and reputation. We use these channels to offer renewable energy and sustainable living products and resources, as well as to create a “community of customers.”
After we receive these high-quality leads, we utilize a focused customer qualification process through which we identify which potential customers are most likely to respond positively to our direct sales efforts. We then utilize our direct sales force to pursue these qualified leads. This qualification process lowers our customer acquisition costs because it narrows our customer leads and allows us to focus our direct sales efforts on highly targeted customers.
BusinessUnited States.
Focused Customer Acquisition Model
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We own a 12-acre campus located in Hopland, California, approximately 95 miles north of San Francisco, called the Real Goods Solar Living Center. The Solar Living Center is a world-famous demonstration site for the technology and culture of solar living, with interactive educational displays. In addition, the site features a 132 kW grid-tied solar energy system that generates more than 175,000 kWh of electricity annually. In 2007, the Solar Living Center had approximately 220,000 visitors. Since it opened in 1996, nearly 2 million people have visited the Solar Living Center, and it has become one of the largest tourist attractions in Northern California throughout the year and especially during SolFest, the premier solar and renewable energy trade show held annually at the Solar Living Center campus.
We have been honored for our ethical and environmental business standards, having received Corporate Conscience Awards from the Council on Economic Priorities. Our founder and Chief Executive Officer, John Schaeffer, received the 2007 Green Power Pioneer Award from the Center for Resource Solutions in conjunction with the Department of Energy. We are a member of California Solar Energy Industries Association (CAL SEIA), Northern California Solar Energy Association (NorCal Solar), American Solar Energy Society (ASES), Redwood Empire Solar Living Association (RESLA), and Colorado Solar Energy Industries Association (CoSEIA). Our Vice President of Commercial Sales and founder of Marin Solar, Roy Phillips, is a board member on CAL SEIA and advocates both in California and nationally for the solar energy industry.
Customers
Division:Our residential customers have historically shared a number of characteristics. They tendare homeowners interested in reducing electrical utility costs and switching to be college-educated homeowners, 30 to 65 years in age, high-income earners who are generally motivated both by environmental and economic reasons to install a solar energy system.clean, renewable energy. Our residential solar energy systems are generally 10kW or smallerrooftop installations up to 24kW in size,size. Our commercial customers come from a variety of industries including retail, manufacturing, service, not-for-profit and municipal services. Oftentimes, our small commercial clients arise from the relationship developed when we install a residential solar system to the owner of the small business. Our commercial solar energy systems may be roof mounted or ground mounted and are generally no larger than 500 kWup to 500kW in size. Occasionally, through the course of our normal operations, we are presented with opportunities for larger (greater than 500kW) commercial solar energy systems. We evaluate each of these large opportunities on a case by case basis while minimizing onerous contract terms. Suppliers POWERHOUSE™: We engage third-party manufacturers to manufacture components of the in-roof POWERHOUSE™ solar shingle. The major components of the POWERHOUSE™ solar shingle consist of the solar laminate, connectors, wire harnesses, base assembly and integrated flashing system. The solar laminate, connectors and wire harnesses are produced by a manufacturer located in China and shipped to our U.S. based manufacturer of the baseplate for assembly into a solar shingle. The solar shingle is then shipped to our third-party logistics provider to warehouse and distribute kitted systems to our customers. Solar Division:Our typicalsolar energy systems utilize photovoltaic modules and inverters purchased from several manufacturers and distributors. The majority of these materials are “Buy American” under the American Recovery and Reinvestment Act of 2009. We negotiate pricing based on quantity purchased and payment terms. Generally, we purchase major components as needed and do not have long-term or volume commitments with suppliers. Competition POWERHOUSE™: Dow developed the POWERHOUSE™ solar shingle and holds various related worldwide patents. Since we obtained the exclusive License to commercialize the product worldwide from Dow, the patents and licenses provide a barrier to entry, thereby limiting the number of competitors. Existing sources of competition include Tesla, Inc., Suntegra and CertainTeed, whom we compete with on market penetration, price and aesthetics. We believe we compete favorably with these companies.
Solar Division: We believe our primary competitors are the traditional local utilities that supply energy to our potential customers. We compete with these traditional utilities primarily based on price, predictability of price and the ease by which customers can switch to electricity generated by our solar energy systems rather than fossil-based alternatives. We believe that our pricing and focus on customer relationships allow us to compete favorably with traditional utilities in the regions we service. Other sources of competition are other solar energy system providers such as Tesla, Inc., Vivint Solar Inc., Sunrun Inc., Sungevity, Inc., and many others. These companies may offer products that are similar to our solar energy systems, and we primarily compete with these companies based on price. We believe that we compete favorably with these companies. Regulations POWERHOUSE™: We will have to maintain compliance with UL standards on POWERHOUSE™ 3.0 solar shingles and on any future new product development. Solar Division: An interconnection agreement is generally required from the applicable local electricity utility to interconnect a solar energy system with the utility grid. In almost all cases, interconnection agreements are standard form agreements that have been pre-approved by the local public utility commission or other regulatory body with jurisdiction over interconnection. As such, no additional regulatory approvals are required once interconnection agreements are signed. We prepare and submit these agreements on behalf of our customers to ensure compliance with interconnection rules. Our operations are subject to stringent and complex federal, state and local laws and regulations governing the occupational health and safety of our employees and wage regulations. For example, we are subject to the requirements of the federal Occupational Safety and Health Act, as amended, or “OSHA”, and comparable state laws that protect and regulate employee health and safety. We expend resources to comply with OSHA requirements and industry best practices. Federal and/or state prevailing wage requirements, which generally apply to any “public works” construction project that receives public funds, may apply to installations of our solar energy systems on government facilities. The prevailing wage is the basic hourly rate paid on public works projects to a majority of workers engaged in a particular craft, classification or type of work within a particular area. Prevailing wage requirements are established and enforced by regulatory agencies. Our in-house personnel monitor and coordinate our continuing compliance with these regulations when required. Some jurisdictions place limits on the size or number of solar energy systems that can be interconnected to the utility grid. This can limit our ability to sell and install solar energy systems in some markets. The regulatory environment is constantly changing. Government Incentives and Policies U.S. federal, state and local governments have established various policies, incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives include tax credits, cash grants, production-based incentives, tax abatements and rebates. These incentives help catalyze private sector investments in solar energy, energy efficiency and energy storage measures, including the installation and operation of residential customerand commercial solar energy systems. Following the extension of the Solar Investment Tax Credit in December 2015, the Internal Revenue Code allows a United States taxpayer to claim a tax credit of 30% of qualified expenditures for a solar energy system that is placed in service on or before December 31, 2019. This credit is scheduled to decline to 26% effective January 1, 2020, 22% in 2021, and then to 10% for commercial projects and 0% for residential projects in 2022. Many U.S. states and local jurisdictions have established property tax incentives for renewable energy systems, which include exemptions, exclusions, abatements and credits. Many state governments, investor-owned utilities, municipal utilities and co-operative utilities offer rebates or other cash incentives for the installation and operation of a solar energy system or energy-related products. Many states have a regulatory policy known as net energy metering, or net metering. Net metering typically allows our customers to interconnect their on-site solar energy systems to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar energy system that is exported to the grid in excess of electric load used by customers. Some states have established limits on net metering, fees on solar energy systems, or reduced the credit available for electricity generated by solar energy systems that are connected to the utility grid. For example, Hawaii, Nevada and Mississippi have announced net metering policies that establish wholesale rates, not retail rates, for crediting electricity produced by solar energy systems. This has adversely impacted the attractiveness of solar energy to residential customers in these markets. The California Public Utilities Commission issued a ruling that maintains the net energy metering credit at full retail value but adds new charges and requirements for customers installing a solar energy system. On the other hand, other states continue to expand their net metering programs. New York, for example, has suspended its cap on solar photovoltaic systems covered by the state’s net metering program. Some states like Massachusetts have offered Solar Renewable Energy Credits (“SRECs”) that provide cash payments based on the electricity produced by solar energy systems as an incentive for customers to invest in these systems. These programs are generally capped and must be reauthorized or extended when the cap is reached in order for the incentives to be continued. The Massachusetts Department of Energy Resources announced that the total capacity available under its most recent SREC program (SREC-II) for projects over 25 kW had been exceeded in early 2016, however it was announced on January 31, 2017 by the Massachusetts Department of Energy Resources that their new program, called Solar Massachusetts Renewable Target (“SMART”), is targeted to start in April 2018 and that the SREC II program would be extended in order to bridge between the two programs. The SREC II program was ultimately extended until November 26, 2018, at which point the first applications for SMART were accepted. The first SMART incentive allocations began January 15, 2019. On January 22, 2018, the Office of the President of the United States approved in substantial form, recommendations by the U.S. International Trade Commission to impose a tariff of 30% on imports of solar cells and photovoltaic modules under Section 201 of the Trade Act of 1974, unless specifically excluded. The 30% tariff declines 5% per year over the four-year term of the tariff. Further, the provisions of the 201 Tariff are applicable to imported solar cells and modules from Canada, despite its being a member of the North American Free Trade Act. Seasonality Our commercial customersquarterly net revenue and operating results for solar energy system installations are difficult to predict and have, included wineries, schools, apartment buildings, churchesin the past, and retail facilities. Suppliers
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 do not manufacture solar PV modules, inverters or other components usedhave historically experienced seasonality in our solar energyinstallation 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 systems, but purchase those components directly from manufacturers or, in some cases, from third-party distributors. We purchasewith the fourth and first quarters of the year seeing less sales orders than the second and third quarters. As previously disclosed, we are exiting our Mainland residential solar PV modules manufactured by Sharp, SunPower, Kyocera Solar and others. We purchase inverters manufactured by Xantrex, Fronius, PVPowered, SMA and others. Competition
The solar energy industry is in its early stages of development and is highly fragmented, consisting of many small, privately held companies with limited resources and operating histories. A number of competitors exist in the California market, including companies such as Akeena Solar and Solar City. Several of our competitors have expanded their market share in the California market by opening multiple offices within the state. We compete on factors such as brand recognition, quality of services and products, pricing, speed and quality of installation.
Regulations
Solar integrator services are subject to oversight and regulation by national and local ordinances, including building, zoning and fire codes, environmental protection regulations, utility interconnection requirements for metering and other rules and regulations. Our design and engineering teams design and install solar energy systems to comply with these varying standards as well as to minimize the installation and operating costs of each system.
Businessbusiness.
As we have just begun to market POWERHOUSE™ in-roof shingles, we do not have historical experience to assess seasonality for this line of business. Intellectual Property
We have registered the trademarks “Real Goods” and “Own Your Power” with the U.S. Patent & Trademark Office. In addition, we hold the copyright for most of the contents of the “Solar Living Sourcebook.”Employees
Seasonality
Our solar energy integration business has not been seasonal to date, but may become more seasonal as we expand our business into new markets.
Employees
As of January 22, 2008,April 29, 2019, we had 83approximately 60 total and full-time employees. None of our employees including installation personnel.are represented by a labor union or subject to a collective bargaining agreement. Facilities and Locations
We own a 12-acre campus
Offerings On January 4, 2018, we closed the January 2018 Offering. On April 9, 2018, we closed the April 2018 Offering. On April 2, 2019, we closed the April 2019 Offering. DESCRIPTION OF PROPERTY Our principal executive offices are located in Hopland, California, which includes offices,Denver, Colorado. The following table sets forth certain information relating to our retail store, and the Solar Living Center. We sublease office spaceprimary facilities: | Primary Locations | | Size (sq. ft.) | | | Use | | Lease Expiration | | Business Segment | | Denver, CO | | | 12,477 | | | Corporate Headquarters | | May-22 | | All | | Bloomfield, CT | | | 10,000 | | | Office and warehouse | | Nov-19 | | Solar Division | | Kailua, HI | | | 10,000 | | | Office and warehouse | | Dec-19 | | Solar Division |
Existing facilities have lease renewal options ranging from Gaiam in Broomfield, Colorado, from which we manage our Colorado solar energy integration business and perform other management and customer service functions. We sublease warehouse space from Gaiam in Cincinnati, Ohio from which we distribute products. We also lease the following facilities from unrelated third parties: an office and warehouse facility in San Rafael, California; an office facility in Hemet, California, and a warehouse facility in Ukiah, California.1 month to 5 years. Legal Proceedings
LEGAL PROCEEDINGS From time to time, we are involved in legal proceedings that we consider to be in the normal course of business. MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Market Information and Holders Effective February 15, 2019, our Common Stock was quoted on the OTCQX under the symbol “RGSE.” Any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. Prior to such date, our Common Stock traded on the Nasdaq Capital Market under the same symbol. On May 1, 2019, we had 87 shareholders of record and 109,639,125 shares of $.0001 par value Common Stock and zero shares of $.0001 par value Class B common stock outstanding. Dividend Policy We have not declared or paid any cash dividends on our Common Stock, and we do not believe thatanticipate doing so in the foreseeable future. We currently intend to retain future earnings, if any, of these proceedings will have a material adverse effectto operate our business and support our future growth strategies. Any future determination to pay dividends on our business. Common Stock will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, contractual restrictions, restrictions imposed by applicable law, capital requirements and other factors that our Board of Directors deems relevant. ManagementEquity Compensation Plan Information
The following tablestable summarizes equity compensation plan information for our Common Stock as of December 31, 2018: | | | Number of securities
to be issued upon
exercise of
outstanding options | | | Weighted average
exercise price of
outstanding options | | | Number of securities
remaining available
for future issuance
under equity
compensation plans | | | Equity compensation plans approved by security holders | | | 1,206,645 | | | $ | 3.22 | | | | 93,500 | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes. This discussion and analysis contain 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 information regardingin this prospectus. Overview For the last 40 years, we have been a residential and small business commercial solar EPC company. 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 a 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. During 2018, we received UL certification for POWERHOUSE™ 3.0 and manufactured our directors, officers and key employees. Allinitial solar shingles during December 2018. We anticipate that in the future, the majority of our directorsrevenue will arise from sales of POWERHOUSE™ in-roof solar shingles to local roofing companies, solar installers and officers were elected or appointed to their current positions effective February 1, 2008, unless otherwise specified. Officers and Key Employeeshomebuilders.
We, including our predecessors, have more than 40 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 26,000 residential and commercial solar energy systems since our founding. We operate as three reportable segments: (1) Solar Division – the installation of solar energy systems for homeowners, including lease financing thereof, and small business commercial in the United States; (2) POWERHOUSE™ - the manufacturing and sales of solar shingles; and (3) Other – corporate operations. On March 27, 2019, our Board of Directors determined to exit its mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with the goal of maximizing future shareholder value. We believe this structure and realignment enables us to effectively manage our operations and resources. As an EPC, 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. As a manufacturer of POWERHOUSE™, we will recognize revenue upon shipment of materials related to customer purchase order fulfillment. During 2018, we established a supply chain to manufacture POWERHOUSE™. We also began building a nationwide network of local roofers and solar installers. We received our first purchase order from a customer on December 27, 2018 and shipped to the customer in January 2019. POWERHOUSE™ License
A material significant event occurred on September 29, 2017, when we executed the License with Dow, providing us an exclusive domestic and international right to commercialize the 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 version was developed with traditional silicon solar cells to increase solar production and to provide a competitive consumer price point. In 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 the TLA allows us to market the POWERHOUSE™ 3.0 product using the Dow name. Under the terms of the License, we will produce, market and sell POWERHOUSE™ 3.0, for which we paid a license fee of $3 million along with a royalty fee equal to 2.5% against net sales of the POWERHOUSE™ product and services, payable quarterly in arrears. Further, we were responsible for all costs to obtain UL certification and we are responsible for the prosecution of all related patents world-wide, which may be offset against the payment of the royalty fee. During December 2018, we began commercialization of POWERHOUSE™ 3.0 entailing the manufacturing, marketing and sale of POWERHOUSE™ 3.0 to roofing companies. As of December 31, 2018, we have invested approximately $3.2 million that has been capitalized to the POWERHOUSE™ License, an intangible asset on the Consolidated Balance Sheet. Other Key Metrics
Backlog
Backlog is discussed below and an important metric as we implement our revenue growth strategy. Key Operational Metric, Gross Margin on Mainland Residential Operations, Currently Our Largest EPC Operating Unit 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 which is 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. Our gross margin percentage on actual installations and with idle time decreased year over year in part due to a greater mix of small commercial projects in 2018 as compared to 2017, as these projects typically have lower margins than our residential installations. Additionally, a majority of indirect labor costs are fixed, which lowers the gross margin % with idle time when there is a decline in revenue as we experienced in 2018 vs. 2017. | | | Twelve Months Ended | | | | | December 31, 2018 | | | December 31, 2017 | | | Gross margin percentage on actual installation time | | | 21 | % | | | 24 | % | | Gross margin percentage including idle time | | | 6 | % | | | 13 | % |
Backlog Backlog represents the dollar amount of revenue that may be recognized in the future from signed contracts to install solar energy systems that have not yet been installed without taking into account possible future cancellations. Backlog is not a measure defined by generally accepted accounting principles 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 received and include anticipated revenues associated with (i) the original contract amounts, and (ii) change orders for which we have received written confirmations from customers. Backlog may not be indicative of future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers. The following table summarizes changes to our backlog for our Solar Division for the years ended December 31, 2018 and December 31, 2017: | (in thousands) | | Solar Division | | | Backlog at January 1, 2017 | | $ | 9,375 | | | Bookings from new awards (“Sales”) | | | 26,596 | | | Cancellations and reductions on existing contracts | | | (9,206 | ) | | Amounts recognized in revenue upon installation | | | (14,000 | ) | | Backlog at December 31, 2017 | | | 12,765 | | | Bookings from new awards (“Sales”) | | | 26,744 | | | Cancellations and reductions on existing contracts | | | (12,835 | ) | | Amounts recognized in revenue upon installation | | | (11,017 | ) | | Backlog at December 31, 2018 | | $ | 15,657 | |
We have experienced a high level of contract cancellations, which we attribute to (i) the competitive nature of the solar industry wherein customers shop price after signing a contract and exercise their right to cancel during a three day rescission period after we countersign their contract, (ii) customer home’s physical condition requires upgrades that they may not be able to afford or reduces their return on investment, and (iii) delays to installing their system within their desired timeframe which are often a result of prolonged periods of time to receive local utility approval for installations. We determined that for optimum internal operations, and customer satisfaction, that a backlog equivalent to a few months of sales is optimal. Revenue Growth Strategy Our plans to increase revenue include: | · | Manufacture, market and sell the POWERHOUSE™ 3.0 to roofing companies, solar installers and home builders; |
| · | Leverage the POWERHOUSE™ brand to generate leads and revenue for the Solar Division; |
| · | 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; |
| · | Expand our EPC operations to new states; and |
| · | Expand our network of authorized third-party installers. |
Recent Developments On March 27, 2019, our Board of Directors determined to exit our mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with the goal of maximizing future shareholder value. We believe this structure and realignment enables us to effectively manage our operations and resources. This realignment is expected to result in the reduction of workforce payroll plus burden of approximately $4.0 million annually. Revenues and net loss in 2018 for the mainland residential solar business were approximately $8.9 million and $6.3 million, respectively. In order for us to convert our existing backlog to revenue, we plan to use authorized integrators to complete installations throughout the remainder of 2019. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or “GAAP.” The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following to be critical accounting policies whose application have a material impact on our reported results of operations, and which involve a higher degree of complexity, as they require us to make judgments and estimates about matters that are inherently uncertain.
Revenue Recognition Effective January 1, 2018, we have adopted “Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 uncertainty of revenue and cash flows arising from contracts with customers. We have 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. Based on our review of contracts that were not substantially completed on December 31, 2017, there was no impact to the opening retained earnings balance.
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 satisfied our performance obligations to the customer and all revenue recognition criteria are met.
Revenue Recognition – Installation of photovoltaic modules (“PV”) solar systems We use standard contract templates to initiate sales with customers and determined that each project started during the year ended December 31, 2018 contains one performance obligation. Although the contract states multiple services which are capable of being distinct, they are considered a single integrated output to the customer which is customized for each customer. As such all the services promised within a contract are considered one performance obligation. We recognize revenue for installation of PV solar systems over time following the transfer of control to the customer which typically occurs as the PV solar system is being installed. If control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation. The method utilized by us to measure the progress towards completion requires judgment and is based on the products and services provided. We utilize the input method to measure the progress of our contracts because it best depicts the transfer of assets to the customer which incurs as materials are consumed by the project. The input method measures the progress towards completion based on the ratio of costs incurred to date (“actual cost”) to the total estimated costs (“budget”) at completion of performance obligation. Revenue, including estimated fees, are recorded proportionally as costs are incurred. Costs to fulfill include materials, labor and/or subcontractors’ costs, and other direct costs. Indirect costs and costs to procure the panels, inverters, and other system miscellaneous costs needed to satisfy the performance obligation are excluded since the customer does not gain control of those items until delivered to the site. Including the costs of those items would overstate the extent of our performance. Each project’s transaction price is included within the contract and although there is only one performance obligation, changes to the contract price could take place after fulfillment of the performance obligation. We have considered financing components on projects started during the year ended December 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 are expected to be received within one year from project completion and there were no adjustments to the contract values. Under ASC 606, we are required to recognize as an asset the incremental costs of obtaining a contract with a customer if those costs are expected to be recovered. We incur sales commissions that otherwise would not have been incurred if the contract had not been obtained. These costs are recoverable; however, we have elected the use of a practical expedient to expense these costs as incurred as the amortization period of the asset would be less than one year.
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. These services are treated as stand-ready performance obligations and are satisfied evenly over the length of the agreement, so we have elected a time-based method to measure progress and recorded revenue using a straight-line method.
Revenue Recognition – Service & Warranty Warranties for workmanship and roof penetration are included within each contract. These warranties cannot be purchased separately from the related services, are intended to safeguard the customer against workmanship defects and does not provide any incremental service to the customer. It is necessary for us to perform the specified tasks to provide assurance that the final product complies with agreed-upon specifications and likely do not give rise to a separate performance obligation. We will continue to account for any related warranties in accordance with ASC 460-10 and record an accrual for potential warranty costs at the completion of a project. Any services provided to a customer outside of warranties such as system inspections are recognized upon completion of the service. Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate anticipated losses based on the expected collectability of all of our accounts receivable, which takes into account collection history, the number of days past due, identification of specific customer exposure and current economic trends. When we determine a balance is uncollectible and no longer actively pursue collection of the account, it is written off. Inventory Inventory for our Solar Division segments consists primarily of solar energy system components (such as photovoltaic modules and inverters) located at our warehouses and is stated at the lower of cost (first-in, first-out method) or net realizable value. We identify the inventory items to be written down for obsolescence based on the item’s current sales status and condition. We write down discontinued or slow-moving inventories based on an estimate of the markdown to retail price needed to sell through our current stock level of the inventories on a quarterly basis. POWERHOUSE™ inventories are recorded at the lower of cost (incurred from third party supply channel manufacturers) or net realizable value. Cost is determined using the first-in, first-out method. Management will establish an estimated excess and obsolete inventory reserve based on slow-moving and obsolete inventory. At December 31, 2018, there was no excess and obsolete inventory reserve.
Warranties Currently, our standard manufacturing warranty for our POWERHOUSE™ solar shingle comes with a 11-year product warranty, which is the standard product warranty of most traditional solar panels today, and a 24-year power production warranty. We receive warranties from our supply chain matching the terms of the POWERHOUSE™ solar shingle warranty. We warrant our EPC 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 typically passed through to the customers, typically have product warranty periods of 10 years and a limited performance warranty period of 25 years. We generally provide for the estimated cost of warranties at the time the related revenue is recognized. We also maintain specific warranty liabilities for large commercial customers. We assess the accrued warranty reserve regularly and adjust the amounts as necessary based on actual experience and changes in future estimates.
Goodwill and Purchased Intangibles We review goodwill for impairment annually during the second quarter, or more frequently if a triggering event occurs between impairment testing dates. As a result of the annual impairment test, we fully impaired the goodwill balance charging an impairment loss to the consolidated statement of operations during the second quarter of 2018. Up-front POWERHOUSE™ 3.0 license payments when incurred, costs to obtain UL certification and legal costs to acquire the License are initially capitalized and thereafter amortized to operations, commencing November 2018 after UL certification, on a straight-line basis over the expected life of the License through 2034.
Common Stock Warrants We account for common stock warrants in accordance with applicable accounting guidance provided in FASB ASC 480,Liabilities – Distinguishing Liabilities from Equity, as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Certain of our warrants are accounted for as liabilities due to provisions either allowing the warrant holder to request redemption, at the intrinsic value of the warrant, upon a change of control, event of default or failure to deliver shares. We classify these warrant liabilities on the Condensed Consolidated Balance Sheet as current or long-term liabilities based on their expiration date. They are revalued at each balance sheet date after their initial issuance with changes in the value recorded in earnings. The Company used a Monte Carlo pricing model to value these warrant liabilities. The Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. The assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 to value the common stock warrant liabilities are as follows: | | | | | | | | | Closing | | | | | | | | | Market | | | Remaining | | | | | Exercise | | | | | | Market Price | | | Risk-free | | | Dividend | | | Price | | | Term | | | | | Price | | | Strike Floor | | | (average) | | | Rate | | | Yield | | | Volatility | | | (years) | | | Warrant Liability April 09, 2018 | | $ | 1.12 | | | $ | 0.97 | | | $ | 0.85 | | | | 2.60 | % | | | 0.00 | % | | | 120 | % | | | 5.00 | | | Warrant Liability June 30, 2018 | | $ | 0.55 | | | $ | 0.19 | | | $ | 0.57 | | | | 2.72 | % | | | 0.00 | % | | | 115 | % | | | 4.78 | | | Warrant Liability September 30, 2018 | | $ | 0.32 | | | $ | 0.19 | | | $ | 0.39 | | | | 2.93 | % | | | 0.00 | % | | | 115 | % | | | 4.53 | | | Warrant Liability December 31, 2018 | | $ | 0.32 | | | | N/a | | | $ | 0.52 | | | | 2.49 | % | | | 0.00 | % | | | 120 | % | | | 4.28 | |
The Company also holds common stock warrants which have been classified in equity. Upon conversion of the warrants, the Company determines the fair value of the warrants exercised using the share price and records the impact to common stock and additional paid-in capital.
Derivatives The 2018 Notes contained conversion features which have been accounted for in accordance with FASB ASC 815,Derivatives and Hedging. The conversion options were embedded within the 2018 Notes but have been separated as (i) their economic characteristics and risks did not clearly and closely relate to the 2018 Notes (ii) the 2018 Notes were not remeasured at fair value and (iii) a separate instrument with the same terms as the conversion options would be considered a derivative. The 2018 Notes also contained various redemption clauses (contingent) that met all the criteria of a derivative and were measured and recorded at fair value at the date of issuance and were revalued at each balance sheet date with changes in the value recorded in earnings. We used a Lattice pricing model to value these derivative liabilities. The Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires us to develop its own assumptions. We classified these derivative liabilities on the Condensed Consolidated Balance Sheet as short-term liabilities since they had maturities of one year. When the conversion option was exercised, for accounting purposes both liabilities (i.e., the debt host and the separated derivative liability) were subject to extinguishment accounting. As such, a gain or loss upon extinguishment of the two liabilities equal to the difference between the recorded value of the liabilities and the fair value of the consideration issued to extinguish them was recorded. The assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 to value the derivative liabilities are as follows: | | | | | | Closing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market | | | | | | | | | Market | | | Remaining | | | | | | | | | First | | | Second | | | | | Conversion | | | Price | | | Risk-free | | | Dividend | | | Price | | | Term | | | Debt | | | Soft Call | | | Redemption | | | Redemption | | | | | Price | | | (average) | | | Rate | | | Yield | | | Volatility | | | (years) | | | Yield | | | Threshold | | | Period | | | Period | | | Derivative Liability April 09, 2018 | | $ | 1.26 | | | $ | 0.85 | | | | 2.08 | % | | | 0.00 | % | | | 110 | % | | | 1.00 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability June 30, 2018 | | $ | 0.55 | | | $ | 0.57 | | | | 2.23 | % | | | 0.00 | % | | | 130 | % | | | 0.78 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability September 30, 2018 | | $ | 0.31 | | | $ | 0.39 | | | | 2.36 | % | | | 0.00 | % | | | 125 | % | | | 0.53 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability December 31, 2018 | | $ | 0.31 | | | $ | 0.52 | | | | 2.45 | % | | | 0.00 | % | | | 90 | % | | | 0.28 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % |
Share-Based Compensation We recognize compensation expense for share-based awards based on the estimated fair value of the award on the date of grant. We measure compensation cost at the grant date fair value of the award and recognize compensation expense based on the probable attainment of a specified performance condition for performance-based awards or over a service period for time-based awards. We use the Black-Scholes option valuation model to estimate the fair value for purposes of accounting and disclosures. In estimating this fair value, certain assumptions are used (see Note 11. Share-Based Compensation in Item 8 of the Financial Statements in this prospectus), including the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of different estimates for any one of these assumptions could have a material impact on the amount of reported compensation expense. Expected volatilities were based on a value calculated using the historical stock price volatility. Expected life was based on the specific vesting terms of the option and anticipated changes to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model was based on U.S. Treasury zero-coupon securities with remaining terms similar to the expected term on the options. RGS does not anticipate paying any cash dividends on its Common Stock in the foreseeable future and, therefore, an expected dividend yield of zero was used in the option valuation model. The assumptions used to value to 2018 Options as of December 31, 2018 are as follows: | 2018 Non-Qualified Stock Options | | | | | | | | | | | | | | | | | | | Expected | | | | | | Market | | | | | Vesting | | Expected | | Dividend | | | Risk-free | | | Price | | | Grant Date | | Period | | Life | | Rate | | | Rate | | | Volatility | | | June 21, 2018 | | 2.78 years | | 4.2 years | | | 0 | % | | | 2.70 | % | | | 148.77 | % | | September 4, 2018 | | 2.82 years | | 5.7 years | | | 0 | % | | | 2.78 | % | | | 147.40 | % | | September 10, 2018 | | 2.81 years | | 5.7 years | | | 0 | % | | | 2.83 | % | | | 146.66 | % | | October 15, 2018 | | 2.96 years | | 4.3 years | | | 0 | % | | | 2.96 | % | | | 149.82 | % | | October 29, 2018 | | 2.92 years | | 4.3 years | | | 0 | % | | | 2.87 | % | | | 150.34 | % |
Income Taxes We recognize income taxes under the asset and liability method. Deferred income taxes are recognized based on temporary differences between financial reporting and income tax bases of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss carry-forward prior to its expiration, is more likely than not. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the appropriate valuation allowance, we consider projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies, and our overall deferred tax position.
Results of Operations
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
POWERHOUSE™ Segment:
We received our first purchase order from a customer on December 27, 2018 and shipped to the customer in January 2019. Accordingly, we have no revenue during 2018 from POWERHOUSE™ and a backlog of one transaction. We commenced amortization of the POWERHOUSE™ license upon receiving UL approval on November 2, 2018 and have recorded two months of amortization expense of $0.03 million. Solar Division Segments: Contract revenue:
Sale and installation of solar energy systems. Sale and installation of solar energy system revenue decreased $2.5 million, or 17.9%, to $11.5 million during the twelve months ended December 31, 2018, from $14.0 million during the twelve months ended December 31, 2017. During the twelve months ended December 31, 2018, installations decreased 0.5 megawatts to 2.8 as compared to the 3.3 megawatts installed during the twelve months ended December 31, 2017. This decrease was primarily due to slower sales in the beginning of the year and a decline in our weighted average selling price per watt of 2.6%. Additionally, limitations including cutbacks of major incentive programs in Massachusetts and Rhode Island caused delays in the installation of our backlog in the fourth quarter of 2018 as approvals required for installation were not available. This delayed the installation of many projects in the fourth quarter, as Massachusetts and Rhode Island comprised a significant portion of our backlog in 2018. As previously disclosed, we are exiting our Mainland residential solar business.
Contract expenses:
Installation of solar energy systems. Installation of solar energy system expenses decreased $1.9 million, or 14.5%, to $11.2 million during the twelve months ended December 31, 2018, from $13.1 million during the twelve months ended December 31, 2017, which corresponds to the reduction of installation revenue during this same time comparison. We utilize gross margin percentage to measure performance utilizing an internal time reporting system allowing us to measure both total incurred contract expense and contract expense excluding construction crew idle time. For the twelve months ended December 31, 2018, our residential segments gross margin without idle time declined due to a 2.6% decline in the average selling price per watt exceeding the 0.8% decline in the costs of installation per watt. Customer acquisition.Customer acquisition expense decreased $2.3 million during the twelve months ended December 31, 2018, or 38.9%, to $3.6 million from $5.9 million during the twelve months ended December 31, 2017. This decrease is primarily attributable to a reduction in workforce related to a targeted focus on increasing individual sales team member key performance indicators and a more selective hiring process allowed for significant improvements in lead performance. Our continued efforts to refine our digital lead development also played a large role in the decrease. Operating expense: Operating expenses decreased $1.0 million, or 9.2%, to $9.8 million during the twelve months ended December 31, 2018 compared to $10.8 million during the twelve months ended December 31, 2017, primarily due to a decrease in labor and legal fees. Other Segment:
Goodwill impairment. Goodwill impairment increased by $1.3 million during the year ended December 31, 2018 due to the results of our annual impairment testing. We concluded that the fair value of the goodwill no longer exceeded its carrying value and wrote off the goodwill balance.
Litigation and proxy contest expense.Litigation and proxy contest expenses during the twelve months ended December 31, 2018 was $0.2 million compared to $1.5 million during the twelve months ended December 31, 2017. The decrease of $1.3 million is primarily attributable to nonrecurring proxy contest expenses of $1.2 million in 2017. Our legal expenses may increase in subsequent periods. See Note 7. Commitments and Contingencies. Change in fair value of derivative liabilities, loss on debt extinguishment and amortization of debt discount & deferred loan costs. The issuance of the 2018 Notes, subsequent conversions and revaluation of the derivative liabilities resulted in our recording derivative liabilities as disclosed in Note 9. Convertible Debt. Additionally, interest expense increased due to the accretion of the debt discount and deferred loan costs related to the 2018 Notes. No such transaction occurred during the year ended December 31, 2017.
Other (income) expenses. Other expenses primarily represent a gain on settlement of a long-term liability with a directors and officers liability insurance provider.
Liquidity and Capital Resources
Our historical operating results indicate substantial doubt exists related to our ability to continue as a going concern. Management’s plans and actions, which are intended to mitigate the substantial doubt raised by our historical operating results in order to satisfy our estimated liquidity needs for a period of 12 months from the issuance of the consolidated financial statements, are discussed below. As we cannot predict, with certainty, the outcome of our actions to generate liquidity, or whether such actions would generate the expected liquidity as currently planned, management’s plans to mitigate the risk and extend cash resources through the evaluation period, are not considered probable under current accounting standards for assessing an entity’s ability to continue as a going concern. As of December 31, 2018, we have cash of $5.8 million, working capital of $6.9 million, debt of $0.3 million and shareholders’ equity of $10.8 million. We have experienced recurring operating losses and negative cash flow from operations which have necessitated: | · | Exiting the mainland residential division and execution of a reduction in workforce, see Note 16. Subsequent Events; |
| · | Focusing on growing POWERHOUSE™ revenue through a re-allocation of personnel to POWERHOUSE™ sales and initiating sales to other solar installers and distribution companies; and |
| · | Raising additional capital. See Note 8. Shareholders Equity and Note 16. Subsequent Events for transactions to raise capital during the second quarter of 2019. |
No assurances can be given that we will be successful with our plans to grow revenue for profitable operations. We have historically incurred a cash outflow from our operations as our revenue has not been at a level for profitable operations. As discussed above, a key component of our revenue growth strategy is the sale of our POWERHOUSE™ 3.0 in-roof solar shingle. We obtained UL certification for POWERHOUSE™ at the close of 2018 and therefore only recently begun to market POWERHOUSE™ at the start of 2019. We believe that we will require several quarters for us to generate sales to meet our goals for profitable operations. The first quarter of the year has always been one of our slowest sales periods and as such, this is a period of higher cash outflow. POWERHOUSE™ 3.0 sales during the first quarter of 2019 have been materially less than our expectations and, accordingly, we raised additional capital during the second quarter of 2019. Additionally, we have arranged with a third-party specialty lender to provide financing to our POWERHOUSE™ roofers for their purchases of POWERHOUSE™ in-roof shingles. Under this agreement, we are to be paid the next day after the roofers place a purchase order and, accordingly, when roofers avail themselves of this financing, we do not have accounts receivable, enhancing our cash flow from operations. As discussed above, (i) we expect that future sales of POWERHOUSE™ 3.0 in-roof solar shingles will be our primary source of revenue and (ii) we only recently began marketing POWERHOUSE™ 3.0, and accordingly, we expect to incur a quarterly cash outflow for a portion of 2019. We have placed purchase orders with our supply chain partners for inventory to be converted to revenue. The Company has prepared its business plan for the ensuing twelve months, which includes the following: | · | Exit from the mainland residential division which historically has generated material cash outflows; |
| · | Generate POWERHOUSE™ revenue through sales to local roofing companies, home builders and EPC companies; |
| · | Convert current mainland residential backlog into revenue through authorized third-party integrators; and |
| · | Increase sales and installations with commercial customers on the mainland and sales and installations of residential and commercial systems in Hawaii. |
Cash Flows The following table summarizes our primary sources (uses) of cash during the periods presented: | | | 2018 | | | 2017 | | | Net cash (used in) provided by: | | | | | | | | | | Operating activities | | | (12,367 | ) | | | (16,035 | ) | | Investing activities | | | (2,146 | ) | | | (1,959 | ) | | Financing activities | | | 19,174 | | | | 16,224 | | | Net increase (decrease) in cash | | $ | 4,661 | | | $ | (1,770 | ) |
Operating activities. Cash outflow from operations for the twelve-month period ended December 31, 2018 decreased $3.7 million as compared to the twelve-month period ended December 31, 2017. This decrease in cash used in operations was primarily due to a reduction of $2.3 million in our customer acquisition costs and a reduction in payroll costs corresponding to a reduction in personnel. Additionally, we collected on receivables from certain previously installed commercial projects and settled on litigation related to a large commercial project which released funds previously held in escrow. Investing activities. During the year ended December 31, 2018, cash outflows for investing activities increased $0.2 million as compared to the twelve-months ended December 31, 2017. We made payments to the Dow Chemical Company attributable to the License of $2.0 million in 2018 and $1.0 million in 2017. Additionally, in 2017 we had approximately $0.8 million in capital expenditures.
Financing activities. Cash inflow from financing activities increased $3.0 million to $19.2 million in 2018 from $16.2 million in 2017. The increase is due to capital raising activities in 2018 providing net cash inflows of $19.2 million consisting of (i) $9.9 million related to the 2018 Notes (ii) $8.7 million related to exercise of warrants and (iii) $1.8 million related to the January 2018 Offering less payments for transaction costs of $1.2 million, as compared to cash inflows of $17.5 million related to the February 2017 offerings discussed in Note 8. Shareholders’ Equity. Additionally, in 2017 we paid $1.0 million to close our revolving line of credit. Off-Balance Sheet Arrangements We have not participated 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. MANAGEMENT DIRECTORS The following table sets forth the names and ages of our current directors: Name and Position | | Age | | BackgroundPosition
| Jirka Rysavy,Chairman
Ian Bowles | | 53 | | Mr. Rysavy was appointed as ourDirector and Chairman January 29, 2008. Mr. Rysavy is the founder and currently serves as the Chairman | | Dennis Lacey | | 65 | | Director and Chief Executive Officer of Gaiam. He has served as Chairman of Gaiam since its inception and became its full-time Chief Executive Officer in December 1998. In 1986, Mr. Rysavy founded Corporate Express, Inc., which, under his leadership, grew to become a Fortune 500 company supplying office and computer products and services. He served as its Chairman and Chief Executive Officer until September 1998. Mr. Rysavy also founded and served as Chairman and Chief Executive Officer of Crystal Market, a health foods market, which was sold in 1987 to become the first Wild Oats Markets store. | | Pavel Bouska | | 65 | | Director | | Robert L. Scott | | 72 | | Director |
Each director serves for a one-year term. Biographical information for each director, including the years in which they began serving as directors and their positions with the Company, are set forth below. IAN BOWLES —age 53—Chairman of the Company’s Board of Directors. Mr. Bowles has served as a director since December 2013. He is Co-founder and Managing Director of WindSail Capital Group, a Boston-based investment firm providing growth capital to emerging clean energy companies; a position he has held since March 2011. Mr. Bowles is also Senior Director of Albright Stonebridge Group, a global strategy firm based in Washington, DC; a position he has held since February 2011. From January 2007 to January 2011, he served as Secretary of Energy and Environmental Affairs of Massachusetts, during which time he oversaw all aspects of energy and environmental regulation and policy in Massachusetts. Earlier in his career, Mr. Bowles served on the White House staff for President Bill Clinton, holding the posts of Senior Director of Global Environmental Affairs at the National Security Council and Associate Director of the White House Council on Environmental Quality. Our Board of Directors believes that Mr. Bowles brings significant strategic focus, regulatory and public policy expertise and financial and industry experience. DENNIS LACEY—age 65—Director and Chief Executive Officer. Mr. Lacey joined the Company in February 2014 as Senior Vice President Finance and became the President of our Residential Solar Division in April 2014 and our Chief Executive Officer and a director in August 2014. Mr. Lacey also served as our acting Principal Financial Officer from October 2014 to February 2016. He brings to his role as Chief Executive Officer more than 25 years of executive financial management experience. Before joining RGS, Mr. Lacey served as the Chief Financial Officer of Community Enhancement Group REIT, Inc., formed to invest in multi-family properties and acquire REIT status, between May 2012 and February 2014. Between January 2010 and March 2012, Mr. Lacey served as Chief Financial Officer and Vice President of Stream Global Services, a publicly-traded company providing business process outsourcing services. Between September 2006 and December 2009, he was the head of capital markets for Republic Financial Corporation, a private investment firm engaged in aircraft leasing and alternative asset management. Before that, Mr. Lacey held a number of senior executive positions at Imperial Bancorp, a $6 billion publicly-traded commercial bank best known for its high-tech lending practice before it was acquired by Comerica. At Imperial Bancorp, he served as Executive Vice President and Chief Financial Officer, President of the SBA Division, and President of the Equipment Leasing Division. Mr. Lacey also served as President and Chief Executive Officer of Capital Associates, a publicly traded equipment leasing company. He previously served as Chief Financial Officer of two multi-billion dollar publicly-traded companies: TeleTech Holdings, Inc., one of the largest customer experience management companies in the United States, and CKE Restaurants, Inc., an owner, operator and franchisor of popular brands in the quick-service restaurant industry. Earlier in his career, Mr. Lacey was an audit partner at Coopers & Lybrand, an accounting firm. Our Board of Directors believes that Mr. Lacey brings significant senior leadership management, operational and financial experience. PAVEL BOUSKA—age 65—Director. Mr. Bouska has served as a director since September 2012. Mr. Bouska has been an independent business consultant since 2006. From 2003 to 2006, he was the Chief Executive Officer and served as a director of ionSKY Inc., a wireless Internet service provider. Between 1999 and 2003, Mr. Bouska served as Executive Vice President and Chief Information Officer of Gaia, Inc. (formerly known as Gaiam, Inc.), as Chief Executive Officer of Gaiam Energy Tech, Inc., the renewable energy division of Gaia that later became Real Goods Solar, and as a director of Gaiam.com, Inc., an e-commerce subsidiary of Gaia. In addition, Mr. Bouska served as a director of Gaia between 1991 and 1999. From 1988 to 1999, he served as Chief Information Officer and Vice President, Information Technology of Corporate Express, Inc., a corporate supplier, as it grew from $2.0 million of gross revenues to a Fortune 500 company. From 1985 to 1988 Mr. Bouska worked as project leader at sd&a software company in Munich, Germany. He has experience with organization management and technology deployment in rapidly growing and changing environments, business unit integrations, and mergers and acquisitions. From 2002 to 2012, Mr. Bouska has also served as President and chairman of the Board of Sunshine Fire Protection District in Boulder, Colorado. Our Board of Directors believes that Mr. Bouska brings significant senior leadership, strategic focus, business development, and renewable energy experience. ROBERT L. SCOTT—age 72—Director. Mr. Scott has served as a director since June 2012. Mr. Scott has advised and assisted a number of companies since retiring as a partner from Arthur Andersen, LLP. From May to November 2009, he served as the interim Chief Financial Officer of Square Two Financial (formerly, Collect America), a private consumer debt company, assisting them with financial administration and transition to a permanent Chief Financial Officer. From 2004 to 2008, Mr. Scott assisted Colorado Mountain Development, engaged in retail land sales primarily in Texas, to improve financial reporting and accounting systems and help transition toward the sale and relocation of the business. During 2003 and 2004, Mr. Scott served as a consultant to KRG Capital Partners, LLC, a Denver-based private equity firm, assisting them with due diligence investigations of certain target companies. Mr. Scott joined Arthur Andersen, LLP, a public accounting firm, in 1970 and was admitted as partner in 1981, continuing through his retirement in 2002. Within Arthur Andersen’s Audit & Business Advisory Group, Mr. Scott served clients in numerous life cycle stages and industries including construction, venture capital, energy exploration and development, manufacturing, cable and satellite television, software development, real estate and manufacturing. Our Board of Directors believes that Mr. Scott brings exceptional technical skills in accounting, internal controls, taxation, equity compensation, and public company matters. EXECUTIVE OFFICERS The following table sets forth the names and ages of our current executive officers: John Schaeffer,Name | | Age | | Position | | Dennis Lacey | | 65 | | Chief Executive Officer and Director | | Alan Fine | |
5865 | |
Mr. Schaeffer founded our business in 1978 and has served as our Chief Executive Officer since 1986. Mr. Schaeffer has been involved in businesses selling solar and renewable energy products for more than 30 years. In 1995, Mr. Schaeffer helped create the Solar Living Center in Hopland, California. Mr. Schaeffer has been honored with numerous awards for his environmental business practices and his entrepreneurial successes. | | | | Vilia Valentine,Chief Financial Officer
| | 47 | | Ms. Valentine has served as Gaiam’s Chief Financial Officer since April 2006. Prior to that, Ms. Valentine served as actingand Chief FinancialAdministrative Officer for Verio Inc., a worldwide Internet service provider, where she managed all financial matters for global operations. Verio was purchased in 2000 for $6.5 billion by NTT Communications Corporation. Prior to joining Verio, Ms. Valentine was Vice President and Controller for Corporate Express, Inc., serving as a member of the management team that grew Corporate Express from $30 million to $3 billion in revenue in less than five years. | Mark Lipien,Vice President, Operations
Nicolle Dorsey | |
4340 | |
Mr. Lipien has served as Gaiam’s Vice President, Operations since 1996. Over the past five years, Mr. Lipien was responsible for a wide variety of functions and departments within Gaiam, including distribution, purchasing, customer service, information technology, catalog circulation, human resources and facilities. Mr. Lipien has also played a major role in integrating Gaiam’s acquisitions into its operations and business model. From 1993 to 1996, Mr. Lipien worked at Corporate Express, Inc. as a member of the acquisition integration team. |
Management
| | | | | Name and Position
| | Age | | Background
| Christina Maxwell,Vice President of Finance
| |
36 | |
Ms. Maxwell has served in various capacities for Gaiam since 2000 and has served as Gaiam’s Corporate Finance Director from 2003 to 2007. She was also responsible for Gaiam’s International Business division from 2004 to 2006. Ms. Maxwell was responsible for Gaiam’s business integration and development functions from 2000 to 2003. Prior to joining Gaiam, Ms. Maxwell was with Apartment Investment and Management Company, serving as corporate controller from 1997 to 1999 and working on large acquisition integrations from 1999 to 2000. Ms. Maxwell has been a CPA since 1994 and served in the audit departments of Deloitte & Touche and Ernst & Young from 1993 to 1997. | Non-Management Directors
| James Argyropoulos
| | 63 | | Mr. Argyropoulos has been primarily engaged as a private investor over the last 15 years. Mr. Argyropoulos founded The Cherokee Group, Inc., a shoe manufacturing and apparel business, in 1972 and served as Chairman and Chief Executive Officer. Mr. Argyropoulos also serves on the board of directors of Gaiam. | | | | Barbara Mowry
| | 59 | | Ms. Mowry has served as Chief Executive Officer of Silver Creek Systems, a provider of enterprise data usability software, since 2003. From 1997 until February 2001, Ms. Mowry served as the President and Chief Executive Officer of Requisite Technology, a business-to-business e-commerce company, specializing in the creation and management of electronic content and catalogs. Prior to joining Requisite Technology, Ms. Mowry was an officer of Telecommunications, Inc. (cable television) from 1995 to 1997 and UAL, Inc. (airline) from 1983 to 1990. Ms. Mowry also serves on the board of directors of Gaiam. | | | | Ted Nark
| | 49 | | Mr. Nark has been a partner at KRG Capital Partners, L.L.C., a private equity investment firm based in Denver, Colorado, since August 2007. Mr. Nark served as Chief Executive Officer of White Cap Construction Supply, a distributor of specialty hardware, tools and materials to construction contractors, from April 2002 through January 2006. From 1998 until 2002, Mr. Nark served as the Chief ExecutivePrincipal Accounting Officer and Managing Director of Corporate Express Australia, a publicly traded business-to-business office product distribution company in Australia. From 1992 until 1998, Mr. Nark served in various capacities with Corporate Express, Inc., including as Northwest Division President from 1992 to 1995 and as Group President from 1995 to 1998. Mr. Nark also serves on the board of directors of FTD Group, Inc. Mr. Nark serves on the board of directors of Gaiam but has indicated his intention to resign from that board upon the completion of this offering.Controller |
ManagementOur executive officers are appointed annually by our Board of Directors. Biographical information about Mr. Lacey is included herein under the heading “DIRECTORS.”
StructureALAN FINE—age 65—Mr. Fine joined the Company in July 2014 as the Director of Commercial Accounting and Finance, was appointed the BoardCompany’s Treasurer and Principal Accounting Officer in October 2014 and was later appointed the Company’s Principal Financial Officer in February 2016, while continuing to serve as the Company’s Treasurer. In September 2017, he was named the Company’s Chief Financial Officer and Chief Administrative Officer. Before joining the Company, he served as the Chief Financial Officer and Principal Accounting Officer of DirectorsRoomlinx, Inc., a public company engaged in in-room guest entertainment systems servicing the hospitality industry, between August 2011 and June 2014. From May 2008 to June 2011, Mr. Fine served as the Chief Financial Officer and Director Independenceof Operations for Pearlstine Distributors, a privately held distributor of Anheuser Busch, Samuel Adams, Heineken, New Belgium and other craft beers to the Charleston, South Carolina market. From November 1997 to May 2000, he served as the Vice President of Finance at Colorado Greenhouse, an international producer of hydroponic tomatoes. Before that, Mr. Fine served as the Chief Financial Officer of Gold Coast Beverage Distributors, a beer and water wholesaler serving Southern Florida, from May 1994 to July 1997. Mr. Fine has a Bachelor of Science degree in accounting from Loyola College of Maryland, a bachelor of science degree in civil engineering from UMASS, Lowell and is a licensed certified public accountant in Pennsylvania.
We have
NICOLLE DORSEY—age 40— Ms. Dorsey joined the Company in September 2016 as Assistant Controller before she was named the Company’s Principal Accounting Officer and Controller in September 2017. Before joining the Company, she worked for Cloud Peak Energy, a boardpublicly held coal producing company, from April 2014 to March 2016. Prior to that Ms. Dorsey worked in public accounting, auditing and performing compliance work for energy sector clients. Ms. Dorsey has a BBA degree in accounting and a Master of directors consistingAccountancy from the University of five directors. Our bylaws provide that the number of directorsWisconsin and is fixed by a majority vote of the board of directors. Our articles of incorporation and bylaws provide that the board of directors consists of a single class, with our directors being elected each year by a plurality of the votes cast at our annual meeting of shareholders. Our board of directors may be removed with or without cause by a majority vote of shareholders. Our board of directors has determined that three of our non-employee directors, namely Messrs. Argyropoulos and Nark and Ms. Mowry, each satisfy Nasdaq Global Market standards to qualify as independent directors as well as any additional independence standards that may be established by the board. Membership on the audit committee is limited to independent directors.licensed certified public accountant in Colorado. Our board of directors has adopted corporate governance guidelines that, along with the charters of our board committees and our code of ethics, provide the framework
EXECUTIVE COMPENSATION Summary Compensation Table The following table includes information concerning compensation for the governance of our company. Committees of the Board of Directors
Our board of directors has two standing committees: audit and compensation. Assignments to, and chairs of, the committees are selected by the board of directors. Each of these committees operates under a charter approved by the board of directors, which describes the principal functions of the committees. Our board of directors has determined that each of the members of our audit committee satisfies all of the independence requirements of the Nasdaq Global Market as well as all independence requirements of the SEC. We will be exempt from certain of the Nasdaq Global Market rules, for example those relating to nominating committees, because we will be deemed to be a controlled company on the basis of Gaiam’s control of more than 50% of our voting power. Accordingly, we do not have a standing nominating committee.
Compensation Committee Interlocks and Insider Participation
The salary and bonus amounts for 2007 reflect payments made by Gaiam or one of its subsidiaries for all services rendered by our executive officers. In the case of Mr. Rysavy and Ms. Valentine, only a portion of these services were rendered to our company. Accordingly, the Gaiam compensation committee determined the compensation of each of our executive officers duringlast two completed fiscal 2007. None of the members of our compensation committee has formerly been an officer or, within the last fiscal year, an employee, of our company or any of its subsidiaries, or had any relationship required to be disclosed under the section entitled “Relationships with Gaiam” below. None of our executive officers
| Ø | | serves as a member of the compensation committee of another entity, one of whose executive officers serves on our compensation committee or board of directors or
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| Ø | | serves as a director of another entity, one of whose executive officers serves on our compensation committee.
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Directors’ Compensation
Directors who are not employees of our company or its affiliates receive a fee of $3,000 for each meeting of our board that they attend and a fee of $1,000 for each telephonic meeting attended. In addition, non-employee directors receive a fee of $500 for attendance at each committee meeting and $250 for each telephonic committee meeting attended. Non-employee chairpersons of each standing committee receive an annual fee of $2,000. Directors may also be awarded stock options from time to time. All directors may elect to receive their compensation in shares of Class A common stock. None of our directors received compensation from us during 2007.
Executive compensation
Compensation Discussion and Analysis
Overview of Our Compensation Program and Philosophy
Our compensation program is intended to meet three principal objectives: (1) attract, reward and retain qualified, energetic officers and other key employees; (2) motivate these individuals to achieve short-term and long-term corporate goals that enhance shareholder value; and (3) support our corporate values by promoting internal equity and external competitiveness.
Our executive compensation program will be overseen and administered by our compensation committee, which will have the ultimate authority to make decisions with respect to the compensation of our named executive officers, but may, if it chooses, delegate any of its responsibilities to subcommittees. The compensation committee will operate under a written charter adopted by our board of directors and is empowered to review and approve the annual compensation for our executive officers.
The principal objectives that will guide the compensation committee in assessing our executive and other compensation programs will include the proper allocation among current cash compensation, short-term bonus compensation and long-term compensation. Other considerations will include our business objectives, our fiduciary and corporate responsibilities (including internal considerations of fairness and affordability), competitive practices and trends and regulatory requirements.
In determining the particular elements of compensation that will be used to implement our overall compensation objectives, the compensation committee will take into consideration a number of factors related to our performance, such as our earnings per share, profitability, revenue growth, and the specific operational and financial performance of certain groups, as well as the competitive environment for our business. Stock price performance is not expected to be a factor in determining annual compensation because the market price of our Class A common stock will be subject to a variety of factors outside of our control.
The compensation committee may meet with certain of our executive officers to obtain recommendations with respect to our compensation programs, practices and packages for executives, other employees and directors. The compensation committee may ask management for its recommendations regarding the base salary, bonus targets and equity compensation for the executive team and other employees. The compensation committee will consider, but will not be bound by and may not always accept, management’s recommendations with respect to executive compensation. The compensation committee may also seek input from one or more independent compensation consultants prior to making determinations on material aspects of our compensation programs, practices and packages.
Elements of Our Compensation Program
The compensation committee believes that compensation paid to our executive officers and other members of our senior management should be closely aligned with our performance on both a short-term and a long-term basis and that such compensation should assist us in attracting and retaining talented persons who are committed to our mission and critical to our long-term success. To that end, the compensation committee believes that the compensation packages for executive officers should consist of three principal components:
| Ø | | Base Salary. Base salaries for executive officers are reviewed on an annual basis and at the time of promotion or other change in responsibilities. Starting salary levels and increases in salary are based on subjective evaluation of such factors as the level of responsibility, individual performance, market value of the officer’s skill set, and relative salary differences within our company for different job levels.
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Executive compensation
| Ø | | Annual Incentive Bonus. Incentive bonuses are generally granted based on a percentage of each executive officer’s base salary. After the end of the fiscal year, the compensation committee determines the extent to which the performance goals were achieved and approves the amount of the bonus to be paid to each executive. The total bonus award is determined according to the level of achievement of both the objective performance and individual performance goals. Below a minimum threshold level of performance, no awards may be granted pursuant to the objective performance goal.
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| Ø | | Long-Term Incentive Compensation. During fiscal 2007, long-term, performance-based compensation of executive officers and other employees took the form of stock option awards granted by our predecessor and such options were assumed by us and became options under the Incentive Plan. The compensation committee believes in the importance of equity ownership for all executive officers and a broader-based segment of our work force, for purposes of economic incentive, key employee retention and alignment of employees’ interests with those of shareholders. The compensation committee believes the Incentive Plan provides us with valuable flexibility to achieve a balance between providing equity-based compensation for employees at all levels, and creating and maintaining long-term shareholder value.
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Stock option grants are typically made when a new executive officer is hired, and in determining the size of stock option grants, the compensation committee will base its determinations on such subjective considerations as the individual’s position within management, experience, market value of the executive’s skill set, and historical grant amounts to similarly positioned executives of our company. All stock options granted during fiscal 2007 will vest at 50% upon completion of this offering, and thereafter approximately 2.0% will vest monthly over the 25 months following completion of this offering.
We have selected these elements because each is considered useful or necessary to meet one or more of the principal objectives of our compensation policy. For instance, base salary and bonus target percentages are set with the goal of attracting employees and adequately compensating and rewarding them on a day-to-day basis for the time spent and the services they perform, while our equity programs are geared toward providing an incentive and reward for the achievement of long-term business objectives and retaining key talent. We believe that these elements of compensation, when combined, are effective, and will continue to be effective, in achieving the objectives of our compensation program.
The compensation committee will review our compensation program on an annual basis. In setting compensation levels for a particular executive, the compensation committee will take into consideration the proposed compensation package as a whole and each element individually, as well as the executive’s past and expected future contributions to our business. We do not have any employment or severance agreements with our executive officers.
Summary Compensation Table
The table below presents the compensation for services in all capacities to our company and its subsidiaries for the periods shown,years for our principal executive officer, principal financial officer, and the other named executive officerofficers of our company for the year ended December 31, 2007.company.
| | | | | | | | | | | | | | | | Name and Principal Position | | Salary(1) | | Bonus(1) | | Option
Awards(2) | | All Other
Compensation(3) | | Total | Jirka Rysavy, Chairman | | $ | 310,151 | | $ | | | $ | — | | $ | — | | $ | 310,151 | John Schaeffer, Chief Executive Officer | | $ | 161,271 | | $ | | | $ | 3,709 | | $ | 3,768 | | $ | 168,748 | Vilia Valentine, Chief Financial Officer | | $ | 229,589 | | $ | | | $ | 104,194 | | $ | 8,736 | | $ | 342,519 |
| | | | | | | | | Option | | | | | | Name and Principal Position | | Year | | | Salary | | | Awards (1) | | | Totals | | | Dennis Lacey | | | 2018 | | | $ | 375,972 | | | $ | 211,600 | | | $ | 587,572 | | | Chief Executive Officer and Director | | | 2017 | | | $ | 375,000 | | | $ | - | | | $ | 375,000 | | | Alan Fine | | | 2018 | | | $ | 191,346 | | | $ | 85,800 | | | $ | 277,146 | | | Chief Financial Officer and Chief Administrative Officer | | | 2017 | | | $ | 185,000 | | | $ | - | | | $ | 185,000 | | | Nicolle Dorsey (2) | | | 2018 | | | $ | 127,914 | | | $ | 42,600 | | | $ | 170,514 | | | Principal Accounting Officer and Controller | | | 2017 | | | $ | 100,346 | | | $ | - | | | $ | 100,346 | |
(1)
| The Salary and Bonus amounts for 2007 reflect payments made by Gaiam or one of its subsidiaries for all services rendered. In the case of Mr. Rysavy and Ms. Valentine, only a portion of these services were rendered to our company. The current annual salary rate for each named executive officer is $315,000 for Mr. Rysavy, $170,000 for Mr. Schaeffer and $250,000 for Ms. Valentine. Bonuses for 2007 will be awarded by Gaiam’s compensation committee and will be paid in 2008.
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Executive compensation
(2)
(1) | The amounts in theOption Awards column reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007,aggregated grant date fair value of awards granted during 2018 and 2017, all of which were computed in accordance with SFAS 123(R), rather than an amount paid to or realized by the named executive officer. These option awards were issued by Gaiam.FASB ASC Topic 718. Assumptions used in the calculation of this amount for the fiscal year ended December 31, 2007 are included in footnote to Gaiam’s audited financial statements for the fiscal year ended December 31, 2007. |
(3)
| All Other Compensation reflects paid time off amounts accrued during 2007 that would be payable upon termination from employment with us and our subsidiaries.
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Grants of Plan-Based Awards
The following table sets forth certain information with respect to the options granted for the year ended December 31, 2007 to the executive officers listed in the Summary Compensation Table above, giving effect to the options assumed from our predecessor.
| | | | | | | | | | | Name | | Grant
Date(1) | | All Other
Option Awards:
Number of
Securities
Underlying
Options(1) | | Exercise or
Base Price
of Option
Awards(1) | | Grant Date
Fair Value of
Stock and
Option
Awards(1) | John Schaeffer | | 1/31/2008 | | 270,000 | | $ | 3.20 | | $ | 471,549 |
(1)
| These options were granted by our predecessor and approved by Gaiam’s board of directors effective July 30, 2007, and were assumed by us after our incorporation on January 29, 2008 and became options under the Incentive Plan on January 31, 2008. Theaggregated grant date fair value offor these options was determinedare included in accordance with SFAS 123(R) usingNote 11. Share-Based Compensation to our audited financial statements, included in Item 8 of the Black-ScholesFinancial Statements in this prospectus. The terms of the options are described under the Outstanding Equity Awards at Fiscal Year-End Table below. The Company did not grant any option pricing model.
awards to its named executive officers during 2017. | | (2) | Ms. Dorsey commenced service as our Principal Accounting Officer and Controller on September 21, 2017. |
Outstanding Equity Awards at Fiscal Year-End The following table includes certain information as of December 31, 2007 with respect to the value of unexercised options previously awarded to any of our executive officers listednamed above in the Summary Compensation Table above, giving effect to the options assumed from our predecessor.and outstanding as of December 31, 2018. | | | Option Awards | | | | Number of Securities Underlying | | | | | | Option | | | | Unexercised Options (1) | | | Option Exercise | | | Expiration Date | | Name | | Exercisable | | | Unexercisable | | | Price (1) | | | (1) | | Dennis Lacey | | | 12 | | | | - | | | $ | 45,120 | | | 2/28/2021 | | | | | 4 | | | | - | | | $ | 26,520 | | | 7/17/2021 | | | | | 25 | | | | - | | | $ | 24,720 | | | 8/18/2021 | | | | | 24 | | | | 10 | (2) | | $ | 1,428 | | | 6/1/2022 | | | | | 47,500 | | | | 142,500 | | | $ | 1.08 | | | 6/21/2025 | | | | | 1,667 | | | | 18,333 | | | $ | 0.32 | | | 10/15/2025 | | Alan Fine | | | 1 | | | | - | | | $ | 31,800 | | | 7/7/2021 | | | | | 2 | | | | - | | | $ | 14,760 | | | 10/19/2021 | | | | | 5 | | | | - | | | $ | 1,428 | | | 6/1/2022 | | | | | 18,750 | | | | 56,250 | | | $ | 1.08 | | | 6/21/2025 | | | | | 1,250 | | | | 13,750 | | | $ | 0.32 | | | 10/15/2025 | | Nicolle Dorsey | | | 8,750 | | | | 26,250 | | | $ | 1.08 | | | 6/21/2025 | | | | | 1,250 | | | | 13,750 | | | $ | 0.32 | | | 10/15/2025 |
| | | | | | | | | | Name | | Number of Securities
Underlying Unexercised
Options (#) | | Option
Exercise
Price(1) | | Option
Expiration
Date(1) | | | Exercisable(1) | | Unexercisable(1) | | | John Schaeffer | | — | | 270,000 | | $ | 3.20 | | 1/30/2015 |
(1)
| (1) | The options reflected in this table vest 50% upon completion of this offering; thereafter, approximately 2%exercise price of the options will vest monthly followingis equal to the completionclosing stock market price of this offering.our Common Stock on the date of grant and the options expire seven years from the date of grant except as noted. For further information, see footnote 6Note 11. Share-Based Compensation to our audited financial statements, forincluded in Item 8 of the fiscal year ended December 31, 2007, included elsewhereFinancial Statements in this prospectus. Except as expressly noted, the unexercisable options vest in 8.3% equal quarterly installments on the last day of each calendar quarter following the grant, contingent on continuous employment. | | (2) | 25% of the options vested immediately upon grant, and the remaining 75% subsequently vest in equal quarterly installments of 5% following the grant. |
Option Exercises
NoneGenerally Available Benefit Programs
We maintain a tax-qualified 401(k) Plan, which provides for broad-based employee participation. Our executive officers are eligible to participate in the 401(k) Plan on the same basis as other employees. Effective January 1, 2019, the Company will match 100% of theemployee contributions up to 3% of salary plus 50% of employee contributions greater than 3% but not to exceed 5% of salary. We do not provide defined benefit pension plans or defined contribution retirement plans to our executives or other employees other than our 401(k) Plan described herein. During 2018, our named executive officers exercised anywere eligible to receive the same health care coverage that was generally available to our other employees. Our benefit programs include medical, dental and vision insurance, long-term and short-term disability insurance, life and accidental death and dismemberment insurance, health and dependent care flexible spending accounts, business travel insurance, wellness programs (including chiropractic, massage therapy, acupuncture, and fitness classes), relocation/expatriate programs and services, educational assistance, and certain other benefits. Our Compensation Committee believes that our 401(k) Plan and contribution matching and the other generally available benefit programs allow us to remain competitive for employee talent, and that the availability of the benefit programs generally enhances employee productivity and loyalty to us. The main objectives of our options during 2007. However, on December 24, 2007, Mr. Schaeffer exercised optionsbenefits programs are to acquire 2,000 shares of Gaiam’s Class A common stock, realizing net proceeds of $46,334. Executivegive our employees access to quality healthcare, financial protection from unforeseen events, assistance in achieving retirement financial goals, and enhanced health and productivity, in full compliance with applicable legal requirements. Typically, these generally available benefits do not specifically factor into decisions regarding an individual executive officer’s total compensation or 2018 Long-Term Incentive Plan award package.
Stock Option Grant Timing Practices Our Compensation Committee administers and grants awards under our 2018 Long-Term Incentive Plan and has granted to our chief executive officer the authority to make awards to our employees that do not report directly to the chief executive officer. During fiscal 2018, our chief executive officer, Compensation Committee and Board of Directors consistently applied the following guidelines for stock option grant timing practices: | • | New Employees: stock option grants to new hires are effective on the first day of the new employee’s employment with us or upon approval by our chief executive officer, Compensation Committee or Board of Directors, as applicable, and the exercise price for the options is set at the closing price of our Common Stock on that date. |
| • | Existing Employees: stock option grants to existing employees are effective on the date that our chief executive officer, Compensation Committee or Board of Directors, as applicable, approves the grant, and the exercise price for the options is set at the closing price of our Common Stock on that date. |
Employment Agreements, Change in Control Agreements and Compensation of our Named Executive Officers On June 1, 2015, we entered into a written employment agreement with Dennis Lacey, outlining the terms of his employment as our Chief Executive Officer. We entered into an amendment to the employment agreement on November 19, 2018 to increase the severance payment Mr. Lacey is eligible for if his employment with the Company is terminated without Cause (as defined in the employment agreement) within 12 months after a Change of Control (as defined in the employment agreement) or if Mr. Lacey terminates his employment for “Good Reason” (as defined in the employment agreement). Pursuant to the terms of the employment agreement, Mr. Lacey will receive an initial annual base salary of $375,000. Our Board of Directors may, in its sole discretion, adjust his base salary but may not reduce the base salary unless such reduction is done in connection with a broad reduction of compensation of our management. Beginning in April 2019, Mr. Lacey voluntarily reduced his annual base salary to $187,500 to reduce company costs until he believes the company is in a better financial position. However, Mr. Lacey is entitled to his full annual base salary at any time under his employment agreement. For each fiscal year, Mr. Lacey is eligible for an annual performance bonus of up to 100% of his base salary, subject to such terms and Severance Arrangementsconditions and upon achievement of performance targets as determined by the Board of Directors or a committee created by its Board of Directors. Mr. Lacey must be an employee on the date a performance bonus is to be paid to be eligible to receive it. We did not pay Mr. Lacey any bonuses for 2016, 2017 or 2018. We do
Mr. Lacey is eligible to participate in the Company’s 401(k) plan and is eligible for expense reimbursement for business expenses incurred in connection with his duties under his employment agreement. Mr. Lacey is also eligible for coverage under group insurance plans and to receive fringe benefits made available to the Company’s executive and management employees. The Company will pay the premiums for coverage of Mr. Lacey and his dependents under such insurance plans. The term of the employment agreement continues until terminated and may be terminated as described below and (i) by mutual agreement between the parties, (ii) automatically, upon Mr. Lacey’s death or disability, (iii) by Mr. Lacey for any or no reason upon 30 days’ prior written notice, and (iv) by the Company for “cause,” as discussed below, effective immediately. If terminated in this manner, the Company will pay to Mr. Lacey any accrued but unpaid base salary, accrued but unused vacation and reimbursable business expenses and Mr. Lacey is not haveentitled to any severance benefits. “Cause” is defined as Mr. Lacey (i) violating in any material respect any term of the employment agreement or a nondisclosure agreement entered into with the Company in 2014, (ii) violating any Company policy, procedure or guideline that results in material harm to the Company, (iii) acting with gross negligence in the performance of his duties resulting in harm to the Company, (iv) engaging in any of the following forms of misconduct: commission of any felony or any misdemeanor involving dishonesty or moral turpitude; theft or misuse of Company’s property; illegal use or possession of any controlled substance; discriminatory or harassing behavior, whether or not illegal under federal, state or local law; or falsifying any document or making any materially false or misleading statement relating to his employment, or (v) failing to cure, within 30 days, any material injury to the economic or ethical welfare of the Company caused by his malfeasance, gross misconduct or material inattention to his duties and responsibilities under the employment agreement (such cure right being limited to one occurrence unless otherwise agreed to by the Board of Directors). In addition to the foregoing, if the Company terminates Mr. Lacey’s employment without “cause,” Mr. Lacey is entitled to severance compensation equal to 12 months of his most recent base salary, which shall be payable in equal installments in accordance with the Company’s standard payroll practice. However, if the Company terminates Mr. Lacey’s employment within 12 months after the consummation of a change of control (as defined in the employment agreement and as discussed below), such severance payment shall equal 24 months of Mr. Lacey’s most recent base salary plus 200% of the maximum performance bonus that Mr. Lacey may earn for such fiscal year and shall be payable in one lump sum within 30 calendar days after termination of employment. A “change of control” means any transaction or series of related transactions (i) the result of which is that any person or persons controlling, controlled by or under common control with such person becomes the beneficial owner of more than 50% of the issued and outstanding Company voting stock (including securities convertible or exercisable for voting stock), (ii) that results in the sale of all or substantially all of the Company’s assets, or (iii) that results in a consolidation or merger whereby the Company is not the surviving entity. Mr. Lacey’s receipt of severance compensation is conditioned on his executing release and confidentiality agreements as further described in the employment agreement. Furthermore, subject to notice and cure periods, Mr. Lacey may terminate the employment agreement for “good reason” if, without Mr. Lacey’s prior consent, (i) the Company materially breaches its obligations under the employment agreement, (ii) following a change of control, the successor company fails to assume the Company’s obligations under the employment agreement, or (iii) within 12 months after a change of control, (A) Mr. Lacey is no longer the Chief Executive Officer of the surviving company, (B) his duties are materially altered or his authority is materially diminished, (C) his employment-related benefits are materially diminished, or (D) the Company’s principal executive offices are moved more than 25 miles from their current location. A termination for “good reason” is deemed to be a termination by the Company without “cause.” On May 31, 2015 and in connection with entering into the employment agreement, our Board of Directors granted Mr. Lacey options to purchase 34 shares of the Company’s Common Stock at an exercise price of $1,428 per share under the Incentive Plan. At the time of grant, 25% of the options immediately vested and the remaining 75% subsequently vest in equal quarterly installments of 5% following the grant. The options awarded to Mr. Lacey include the following terms and conditions: | · | The options expire on the seventh anniversary of the effective date of the applicable stock option grant and may not be exercised after the close of business on the applicable expiration date; |
| · | The options vest over a five-year period at a rate of 5.0% on the last day of each calendar quarter occurring after the effective date of the applicable grant so long as the grantee has been continuously employed from the effective date of grant through the applicable vesting date; |
| · | All of the unvested shares will vest immediately prior to the consummation of a change in control (which definition is substantively the same as the description of the definition of change of control in the employment agreement), provided that the grantee is an employee on the date the change in control is consummated; |
| · | Vesting ceases on the date the grantee ceases to be an employee; |
| · | Following the last day of employment, vested options may be exercised at any time during the lesser of (i) 30 days starting the day after the last date of employment, or (ii) the remaining term of the options; provided that if termination occurs (A) due to death or disability while grantee is employed, the options may be exercised at any time during the lesser of (1) one year starting the day after the last date of employment, or (2) the remaining term of the options, or (B) due to retirement, the option may be exercised at any time during the lesser of (1) the three month period commencing on the first day after the employees last day of employment, or, if employee dies during the three month period commencing on the first day after employee’s last day of employment, then the one year period commencing on the first day after the employee’s last day of employment with RGS, or (2) the remaining term of the option; and |
| · | In connection with their receipt of stock options under the Employee Stock Option Agreement, employees agree to be subject to typical non-disparagement, confidentiality and non-compete provisions. |
On November 14, 2018, we entered into change in control agreements (the “Change in Control Agreements”) with certain executive officers, employees that report directly to the Company’s Chief Executive Officer and certain other employees considered to be part of the Company’s senior leadership, including with each of Mr. Fine and Ms. Dorsey. The Change in Control Agreements are in substantially the same form and provide that in the event a Change in Control (as defined below) occurs, and either (i) any successor to the Company as a result of a Change in Control fails to assume the Company’s obligations under the applicable Change in Control Agreement, or (ii) within the one-year period immediately following the consummation of the Change in Control, the subject employee’s employment with the Company is (a) involuntarily terminated by the Company without Business Reasons (as defined in the Change in Control Agreement) or (b) voluntary terminated by the subject employee for Good Reason (as defined in the Change in Control Agreement), then such employee shall receive a lump sum severance payment equal to a percentage of the sum of his or her base salary plus target bonus for the year in question. Mr. Fine’s and Ms. Dorsey’s percentage is 100%. The Change in Control Agreements were approved to promote the incentive employees to stay with the Company during and after a potential future change in control transaction to promote shareholders’ interests and preserve value. A “change in control” is defined in the Change in Control Agreements as a single transaction or a series of related transactions of any one or more of the following (subject to some exceptions): (i) any merger, consolidation or business combination of the Company with or into any other entity or person, or any other reorganization, in each case in which the equity holders of the Company immediately prior to such merger, consolidation, business combination or reorganization, own less than 50% of the voting power of the surviving entity immediately after such merger, consolidation, business combination or reorganization, (ii) any transaction in which in excess of 50% of the Company's voting power is transferred to a person or a group other than the equity holders of the Company immediately prior to such transaction(s), or (iii) a sale or other disposition of all or substantially all of the assets of the Company. Other than as described above, we have not entered into traditional employment agreements or change in control agreement with any of ourother named executive officers. However,Generally, those named executive officers who have been granted stock options, are subject to covenants concerning confidentiality, non-competition, non-solicitation of employees and customers and assignment of inventions contained in our directors, officers, and managers are generally required to sign a confidentiality agreement and, upon receiving astandard form of stock option grant, a two-year non-compete agreement commencing withexecuted upon grant. Potential Payments Upon Termination or Change-in-Control Pursuant to the date they leaveterms of the employment agreement with Mr. Lacey and the Change in Control Agreements with Mr. Fine and Ms. Dorsey, each is entitled to receive the severance payments in the amount and pursuant to the terms described above in “Employment Agreements, Change in Control Agreements and Compensation for our Named Executive Officers.” Our standard form of our company.stock option agreement provides that option vesting ceases upon termination of employment. A former employee may exercise vested options (i) within 30 days (generally), (ii) within three months (upon retirement at or after normal retirement age) or (iii) within one year (upon termination due to death or disability or (iv) within one year (after a change of control) after termination, but in no event after the expiration term of the applicable option. Additionally, 100% of unvested options immediately vest upon the occurrence of a change of control. Accounting and Tax Considerations In designing our compensation programs, we take into consideration the accounting and tax effect that each element will or may have on us and theour executive officers and other employees as a group.employees. We aim to keep the expense related to our compensation programs as a whole within certain affordability levels. When determining how to apportion between differing elements of compensation, our goal is to meet our objectives while maintaining relative cost neutrality. For instance, if we increase benefits under one program resulting in higher compensation expense, we may seek to decrease costs under another program in order to avoid a compensation expense that is above the level then deemed affordable under existing circumstances. We typically willFor options, we recognize a charge to earnings for accounting purposes equally from the grant date until the end of the vesting period of options.period. We believe we have structured our compensation programsprogram to comply with Internal Revenue Code Sections 162(m) and 409A. Under Section 162(m) of the Internal Revenue Code,, a limitation is placed on tax deductions of any publicly heldpublicly-held corporation for individual compensation to certain executives of such corporation exceeding $1.0$1 million duringin any taxable year, unless the compensation is performance-based.year. If an executive is entitled to nonqualified deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, then the benefits are taxable in the first year they are not subject to a substantial risk of forfeiture. In such case, the service provider is subject to regular federal income tax, interest and an additional federal income tax of 20% of the benefit includible in income. We do not believe we have no individuals with non-performance-basednon-performance based compensation paid in excess of the Internal Revenue Code Section 162(m) tax deduction limit. Certain Other Plans and Arrangements
The Real Goods 2008 Long-Term Incentive PlanDirector Compensation Policy
The Incentive Plan was approved by our board and by Gaiam, our sole shareholder, on . The purpose of the Incentive Plan is to advance the interests
During 2018, directors who were not employees of our company or its affiliates were paid an annual retainer of $20,000 plus fees of $1,000 for each in-person board meeting attended, $200 for each telephonic board meeting attended, $500 for each committee meeting attended and its shareholders by providing incentives to certain employees$200 for each telephonic committee meeting attended. Members of each standing committee receive an annual fee of $4,000 and other key individuals who perform services for us, including those who contribute significantly to the strategic and long-term performance objectives and growthchairpersons of our company.each standing committee receive an annual fee of $10,000. Director Compensation Table The Incentive Plan is administered by our board of directorsfollowing table provides compensation information for the year ended December 31, 2018 for each director who served during 2018 and was compensated for his or if the board of directors so designates, byher service other than as a committee of the board. Our board of directors is expected to designate the compensation committee to administer the Incentive Plan. named executive officer. | | | Fees Earned or | | | Option | | | | | | Name | | Paid in Cash | | | Awards (1) | | | Totals | | | Ian Bowles | | $ | 50,600 | | | $ | 50,200 | | | $ | 100,800 | | | Robert L. Scott | | $ | 44,600 | | | $ | 50,200 | | | $ | 94,800 | | | Pavel Bouska | | $ | 30,200 | | | $ | 50,200 | | | $ | 80,400 | |
| (1) | The amounts in theOption Awards column reflect the aggregated grant date fair value of awards granted during 2018 and 2017, all of which were computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of the aggregated grant date fair value for these options are included in Note 11. Share-Based Compensation to our audited financial statements, included in Item 8 of the Financial Statements in this prospectus. All directors have 50,008 option awards outstanding as of December 31, 2018. |
BENEFICIAL OWNERSHIP OF SHARES The compensation committee may delegate administrative responsibilities if so permitted by applicable law, other thanfollowing table sets forth information with respect to executive officers who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Incentive Plan provides for the granting of several types of awards, including stock options, stock appreciation rights, or SARs, (rights to receive, without payment to us, cash, Class A common stock, other property or any combination thereof, based on the increase in the value of the number of shares of Class A common stock specified in the award), restricted stock (an award of a number of shares of Class A common stock that are subject to certain restrictions, such as a requirement that the shares shall be forfeited if the holder’s employment or performance of services for us terminates), performance grants (cash, shares of Class A common stock, other consideration such as otherbeneficial ownership of our company’s securities or property or a combination thereof that is paid based on the performanceCommon Stock as of the holder, our company, one or moreApril 29, 2019 (except as noted) for (i) each person (or group of our subsidiaries, divisions or units, or any combination thereof) and other awards deemed by the compensation committee to be consistent with the purposes of the Incentive Plan. Awards may be granted alone, or in conjunction with one or more other awards,affiliated persons) who, insofar as determined by the compensation committee. Executive compensation
A maximum of 1,000,000 shares of our Class A common stock are authorized to be issued under the Incentive Plan in connection with the grant of awards, subject to adjustments described below. After this offering, approximately 700,000 shares will be available for grant. The Class A common stock issued under the Incentive Plan may be either newly issued shares, treasury shares, reacquired shares or any combination thereof. If our Class A common stock issued as restricted stock or otherwise subject to repurchase or forfeiture rights is reacquired by us pursuant to such rights, or if any award is canceled, terminates or expires unexercised, the Class A common stock which would otherwisewe have been issuable pursuantable to such awards will be available for issuance under new awards.
The compensation committee will have exclusive discretion to select the employees and other key individuals performing services for us to whom awards will be granted; to determine the type, size and terms of each award; to modify within certain limits the terms of any award; to determine the time when awards will be granted; to establish performance objectives; to prescribe the form of documents representing awards under the Incentive Plan; and to make all other determinations that it deems necessary or desirable in the interpretation and administration of the Incentive Plan. The compensation committee will have the authority to administer and interpret the Incentive Plan, and its decisions will be final, conclusive and binding.
Awards under the Incentive Plan
| Ø | | Stock Options. A stock option, which may be a nonqualified or an incentive stock option, is the right to purchase a specified number of shares of Class A common stock at a price fixed by the compensation committee. The option exercise price for nonqualified options may be equal to or greater than the fair market value of the Class A common stock. In the case of incentive stock options, the option exercise price may not be less than the fair market value of the underlying shares of Class A common stock on the date of grant and, with respect to incentive stock options granted to our employees or any of our affiliates who own more than 10% of the voting power of all classes of our stock or the stock of any of our affiliates, the option exercise price may not be less than 110% of fair market value on the date of the grant.
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Stock options will generally expire not later than ten years or, in the case of incentive stock options granted to employees who ownascertain, beneficially owned more than 10%5% of our stock, five years, after the date on which they are granted. Stock options become exercisable at such times and in such installments as the compensation committee determines. Payment of the option exercise price must be made in full at the time of exercise in cash, by tendering to us shares of Class A common stock, by a combination thereof or by any other means that the compensation committee deems appropriate, which may include the surrender of rights in one or more outstanding awards.
| Ø | | Other Awards. The Incentive Plan also authorizes several other types of awards. These include SARs, restricted stock, and performance grants.
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Additional Information
Under the Incentive Plan, if any change in the outstanding shares of Class A common stock occurs by reason of a stock split, stock dividend, combination, subdivision or exchange of shares, recapitalization, merger, consolidation, reorganization or other extraordinary or unusual event, the compensation committee may direct appropriate changesour Common Stock, (ii) each director, (iii) each executive officer named in the termsSummary Compensation Table above, and (iv) all current directors and executive officers as a group. As of any award or the number ofApril 29, 2019, there were 109,639,125 shares of Class A common stock available for awards. Such changes may include the number or kind of securities that may be issued, the number or kind of securities subject to, or the option exercise price under, any outstanding stock option, the number or kind of securities which have been awarded as restricted stock or any related repurchase option price, the number or value of performance grants, the number or value of any other award, or any measure of performance of any award.
The Incentive Plan permits the compensation committee to determine whether it is advisable for us or any of our affiliates to provide financing in connection with the exercise of an awardCommon Stock and the payment of related taxes, or to assist in obtaining
Executive compensation
financing from a bank or other third party in this regard. Such assistance may take any form and be on such terms as the compensation committee considers appropriate, which may include a direct loan, a guaranty of the obligation to a third party or the maintenance by us or any of our affiliates of deposits with a bank or third party.
The compensation committee may permit payment of taxes required to be withheld with respect to an award in any appropriate manner, which may include by the surrender to us ofno shares of Class A common stock owned by such person or that would otherwise be distributed, or have been distributed, as the case may be, pursuant to such award.
Generally, no awards under the Incentive Plan may be assigned or transferred in whole or in part, either directly or by operation of law or otherwise (except in the event of a holder’s death), although the compensation committee may approve transfers of awards to certain permitted transferees as defined under the Incentive Plan.
The expenses of the Incentive Plan are borne by us. The Incentive Plan will terminate upon the earlier of the adoption of a resolution by the board of directors terminating the Incentive Plan or ten years following the effective date, unless extended by action of the board of directors for up to an additional five years for the grant of awards other than incentive stock options. The board of directors may amend the Incentive Plan at any time and from time to time for any purpose consistent with the goals of the Incentive Plan. However, if failure to obtain shareholder approval would adversely affect compliance of the Incentive Plan with Rule 16b-3 promulgated under the Exchange Act, or other applicable law or regulation, no amendment will be effective unless and until approved by shareholders.
Generally Available Benefit Programs
We plan to maintain a tax-qualified 401(k) Plan, which will provide for broad-based employee participation. Executive officers will be eligible to participate in the 401(k) Plan on the same basis as other employees. During fiscal 2007, the named executive officers participated in a tax-qualified 401(k) Plan maintained by Gaiam, which made matching contributions beginning April 1, 2007. As of that time, under the Gaiam 401(k) Plan, all eligible employees were eligible to receive matching contributions from Gaiam, and this matching contribution was equal to $0.50 for each dollar contributed by an employee up to a maximum annual matching benefit of $1,500 per person. The matching contribution was calculated and paid on a payroll-by-payroll basis, subject to applicable federal limits. Gaiam did not, and we do not currently intend to, provide defined benefit pension plans or defined contribution retirement plans to our executives or other employees other than the 401(k) Plans described herein.
During fiscal 2007, our executive officers were eligible to receive the same health care coverage that is generally available to our other employees. We also offer a number of other benefits to the named executive officers pursuant to benefit programs (directly or through Gaiam) that provide for broad-based employee participation. These benefit programs include the medical, dental and vision insurance, long-term and short-term disability insurance, life and accidental death and dismemberment insurance, health and dependent care flexible spending accounts, business travel insurance, wellness programs, relocation and expatriate programs and services, educational assistance and certain other benefits.
These plans and other generally available benefit programs allow us to remain competitive for employee talent, and the compensation committee believes that the availability of these benefit programs generally enhances employee productivity and loyalty to us. The main objectives of our benefit programs are to give our employees access to quality healthcare, financial protection from unforeseen events, assistance in achieving retirement financial goals and enhanced health and productivity, in full compliance with applicable legal requirements. These generally available benefits typically do not specifically factor into decisions regarding an individual executive officer’s total compensation or Incentive Plan awards.
Relationships with Gaiam
Repayment of Indebtedness to Gaiam
We expect to use approximately $19.8 million of the net proceeds of this offering to repay amounts advanced by Gaiam to acquire and expand our business. In January 2008, Gaiam advanced us an additional $3.5 million to acquire Carlson Solar. As of December 31, 2007, Gaiam had advanced us approximately $16.3 million to finance such acquisitions and for other corporate purposes. We have no formal written loan agreement with Gaiam regarding our intercompany payable, and it has no maturity date. Gaiam historically did not charge us interest on this intercompany payable.
Intercorporate Services Agreement
On or before the completion of this offering, we will enter into an Intercorporate Services Agreement with Gaiam. Under the Intercorporate Services Agreement, Gaiam will agree to provide to us certain services that may include business and facilities management, human resources and employee benefits, payroll, internal audit and risk management, treasury and cash management, tax, legal, accounts payable, telecommunications services, including call center support, and information technology services.
Gaiam will agree to make each service available to us on an as-needed basis for periods of time to be agreed upon. We will pay a service charge that will generally reflect the same payment terms and be calculated using the same cost allocation methodologies for the particular service as those associated with our historical costs, and the recipient will reimburse the provider any out-of-pocket expenses, including the cost of any third-party consents required.
Tax Sharing and Indemnification Agreement
On or before the completion of this offering, we will enter into a Tax Sharing and Indemnification Agreement with Gaiam that generally will govern Gaiam’s and our rights, responsibilities, and obligations after this offering with respect to taxes, including ordinary course of business taxes and taxes, if any, incurred as a result of this offering. Under the Tax Sharing and Indemnification Agreement, we expect, with certain exceptions, that we will generally be responsible for the payment of all income and non-income taxes attributable to our operations and the operations of our direct and indirect subsidiaries, whether or not such tax liability is reflected on a consolidated or combined tax return filed by Gaiam. Under the Tax Sharing and Indemnification Agreement, after the date we cease to be a member of Gaiam’s consolidated group for federal income tax purposes, to the extent we become entitled to utilize any tax credit and loss carryforwards created prior to the date of deconsolidation, we will be required to distribute to Gaiam the tax effect of such carryforwards. In addition, we generally will be responsible for a portion of any additional taxes that are required to be paid for periods prior to this offering date as a result of a tax audit. The Tax Sharing and Indemnification Agreement will also set forth the respective rights, responsibilities, and obligations between Gaiam and us with respect to the filing of tax returns, the administration of tax contests, assistance and cooperation and other tax matters.
Registration Rights Agreement
We will enter into a Registration Rights Agreement with Gaiam, the current holder of our Class B common stock (or its permitted transferee), on or before the completion of this offering. Foroutstanding.
| | | Amount and | | | | | | | | Nature of | | | | | | | | Beneficial | | | Percent of | | | Name and Address of Beneficial Owner | | Ownership (1) | | | Class | | | Hudson Bay Capital Management LP (2) | | | 9,116,707 | | | | 7.77 | % | | Intracoastal Capital, LLC (3) | | | 8,942,342 | | | | 7.75 | % | | Dennis Lacey (4) | | | 436,662 | | | | * | | | Alan Fine (5) | | | 122,478 | | | | * | | | Nicolle Dorsey (6) | | | 14,150 | | | | * | | | Pavel Bouska (7) | | | 35,829 | | | | * | | | Ian Bowles (8) | | | 165,830 | | | | * | | | Robert L. Scott (9) | | | 65,825 | | | | * | | | All directors and executive officers as a group (6 persons) (10) | | | 840,774 | | | | 0.91 | % |
| * | Indicates less than 1% ownership. |
| (1) | This table is based upon information supplied by officers, directors and principal shareholders directly to the Company or on Schedules 13D and 13G and Forms 3, 4 and 5 filed with the SEC. All beneficial ownership is direct and the beneficial owner has sole voting and investment power over the securities beneficially owned unless otherwise noted. Share amounts and percent of class include stock options exercisable and restricted stock vesting within 60 days after April 29, 2019. | | (2) | According to information available to the Company, consists of (i) 832,031 shares of our Common Stock; (ii) 4,882,603 shares of our Common Stock issuable upon exercise of warrants that are currently exercisable (subject to a 4.99% beneficial ownership limitation); and (iii) 3,402,073 shares of our Common Stock issuable upon exercise of warrants that are currently exercisable (subject to a 9.99% beneficial ownership limitation). Does not include additional shares of Common Stock issuable upon exercise of additional warrants because the holder does not have the right to receive such shares if the holder, together with certain attribution parties, would beneficially own in excess of 4.99% of the outstanding shares of our Common Stock. Hudson Bay Capital Management LP, the investment manager of Hudson Bay Master Fund Ltd., has voting and investment power over these securities. Sander Gerber is the managing member of Hudson Bay Capital GP LLC, which is the general partner of Hudson Bay Capital Management LP. Hudson Bay Capital Management LP may be deemed to be the beneficial owner of all shares of Common Stock underlying the securities held by Hudson Bay Master Fund Ltd. Mr. Gerber disclaims beneficial ownership of these securities. The address of Hudson Bay Master Fund Ltd. is c/o Hudson Bay Capital Management LP, 777 Third Avenue, 30th Floor, New York, NY 10017. |
| (3) | According to a Schedule 13G filed April 11, 2019 by Intracoastal Capital LLC (“Intracoastal”), Mitchell P. Kopin and Daniel B. Asher and information available to the Company. Consists of (i) 3,255,658 shares of our Common Stock; and (ii) 5,686,684 shares of our Common Stock issuable upon exercise of warrants that are currently exercisable (subject to a 4.99% or 9.99% beneficial ownership limitation). The reporting persons share voting and dispositive power over the shares. Mr. Kopin and Mr. Asher, each of whom are managers of Intracoastal, share voting control and investment discretion over the securities held by Intracoastal. As a result, each of Mr. Kopin and Mr. Asher may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of the securities held by Intracoastal. The address of Intracoastal and Mr. Kopin is 245 Palm Trail, Delray Beach, FL 33483. The address of Mr. Asher is 111 W. Jackson Boulevard, Suite 2000, Chicago, IL 60604. | | (4) | Consists of (i) 170,000 shares of our Common Stock owned by Mr. Lacey, (ii) 155,000 shares of our Common Stock owned by a limited partnership, of which Mr. Lacey and his spouse are each a general partner and a limited partner, over which Mr. Lacey shares voting and investment power with his spouse, (iii) 45,000 shares of our Common Stock owned by Mr. Lacey’s spouse, (iv) 49,232 shares of our Common Stock issuable upon exercise of stock options that are currently exercisable and (v) 17,430 share of our Common Stock issuable upon exercise of stock options exercisable within 60 days after April 29, 2019. | | (5) | Consists of (i) 95,000 shares of our Common Stock, (ii) 20,008 shares of our Common Stock issuable upon exercise of stock options that are currently exercisable and (iii) 7,470 share of our Common Stock issuable upon exercise of stock options exercisable within 60 days after April 29, 2019. | | (6) | Consists of (i) 10,000 shares of our Common Stock issuable upon exercise of stock options that are currently exercisable and (iii) 4,150 share of our Common Stock issuable upon exercise of stock options exercisable within 60 days after April 29, 2019. | | (7) | Consists of (i) 20,004 shares of our Common Stock, (ii) 11,675 shares of our Common Stock issuable upon exercise of stock options that are currently exercisable and (iii) 4,150 share of our Common Stock issuable upon exercise of stock options exercisable within 60 days after April 29, 2019. | | (8) | Consists of (i) 150,005 shares of our Common Stock, (ii) 11,675 shares of our Common Stock issuable upon exercise of stock options that are currently exercisable and (iii) 4,150 share of our Common Stock issuable upon exercise of stock options exercisable within 60 days after April 29, 2019. | | (9) | Consists of (i) 50,000 shares of our Common Stock, (ii) 11,675 shares of our Common Stock issuable upon exercise of stock options that are currently exercisable and (iii) 4,150 share of our Common Stock issuable upon exercise of stock options exercisable within 60 days after April 29, 2019. | | (10) | Includes Messrs. Lacey, Fine, Dorsey, Bouska, Bowles, and Scott. |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Related Party Transactions The following is a description of certain transactions involving us and persons who are considered “related persons,” as such term is defined in Item 404 of Regulation S-K. Transactions with Hudson Bay We believe that Hudson Bay Master Fund, Ltd. (“Hudson Bay”) currently is a “related person” as a result of being the Registration Rights Agreement, see “Descriptionbeneficial owner of more than 5% of our Capital Stock—Registration Rights”outstanding Common Stock. In addition, we believe that Hudson Bay either was a “related person” at the time of, or became a “related person” as a result of, entering into the transactions listed below. On April 1, 2016, we sold $6.0 million in principal amount of 2016 Notes and Series G Warrants to purchase 4,980 shares of our Common Stock to Hudson Bay as part of the April 2016 Offering. As a result of the purchase of the 2016 Notes, Hudson Bay became the beneficial owner of up to 9.99% of our outstanding Common Stock. The 2016 Notes bore interest at 8% per annum (or 18% per annum during an event of default). As of April 1, 2019, the maturity date of the 2016 Notes, we have converted into shares of our Common Stock $5,999,000 in principal and $274,395 in accrued interest owed to Hudson Bay. As a result, we have issued an aggregate of 334,303 shares of our Common Stock to Hudson Bay. The largest amount of principal outstanding since January 1, 2017 and the date of this prospectus was $124,000. On April 1, 2019, we made a payment of $1,281.02 to pay off the outstanding principal balance and related accrued interest under the 2016 Notes. On February 6, 2017, we sold an aggregate of $2.6 million of units to Hudson Bay as part of a registered offering of an aggregate amount of $11.5 million of (i) “primary units” consisting of one share of our Common Stock, and a Series K warrant to purchase one share of our Common Stock and (ii) “alternative units” consisting of a prepaid Series L warrant to purchase one share of our Common Stock, and a Series K Warrant to purchase one share of Common Stock (the “February 6, 2017 Offering”). We sold the primary units at an initial purchase price of $3.10 per unit and the alternative units at an initial purchase price of $3.09 per unit. Hudson Bay purchased 290,323 primary units and 547,146 alternative units. As a result of the February 6, 2017 Offering, Hudson Bay received an aggregate of 290,323 shares of our Common Stock, a Series K warrant to purchase 837,469 shares of our Common Stock and a Series L warrant to purchase 547,146 shares of our Common Stock. On February 9, 2017, we sold an aggregate of $2.7 million of units to Hudson Bay as part of a registered offering of an aggregate amount of $6.0 million of (i) “primary units” consisting of one share of our Common Stock, and a Series M warrant to purchase 75% of one share of our Common Stock, and (ii) “alternative units” consisting of a prepaid Series N warrant to purchase one share of our Common Stock, and a Series M Warrant to purchase 75% of one share of Common Stock (the “February 9, 2017 Offering”). We sold the primary units at an initial purchase price of $2.50 per unit and the alternative units at an initial purchase price of $2.49 per unit. Hudson Bay purchased 500,000 primary units and 600,000 alternative units. As a result of the February 9, 2017 Offering, Hudson Bay received an aggregate of 500,000 shares of our Common Stock, a Series M warrant to purchase 825,000 shares of our Common Stock, and a Series N warrant to purchase 600,000 shares of our Common Stock. On January 4, 2018, we sold (i) 800,000 shares of Common Stock, (ii) a prepaid Series P Warrant to purchase 800,000 shares of Common Stock, and (iii) a Series O Warrant to purchase 1,600,000 shares of Common Stock to Hudson Bay for aggregate gross proceeds of approximately $1.8 million in connection with the January 2018 Offering. We sold the shares of Common Stock at a purchase price of $1.15 per share, and the share of Common Stock underlying the Series P Warrant at a purchase price of $1.14 per share. On April 9, 2018, we sold $3,225,000 in principal amount and $3 million funding amount (reflecting $225,000 of original issue discount) of 2018 Notes and Series Q Warrants to purchase 2,781,137 shares of our Common Stock to Hudson Bay as part of the April 2018 Offering. The 2018 Notes do not bear interest other than upon the occurrence of an event of default, in which case the 2018 Notes bear interest at 18% per year. As of April 9, 2019, the maturity date of the 2018 Notes, we have converted into shares of our Common Stock $3,199,800 in principal, $5,249,145 of Additional Amount (as defined in the Series A Notes) and $3,132,508 of Additional True-Up Amount (as defined in the Series B Notes). As a result, we have issued an aggregate of 24,099,375 shares of Common Stock to Hudson Bay. The largest amount of principal outstanding since January 1, 2018 and the date of this prospectus was $1,725,000. On April 9, 2019, we made a payment of $50,200 to pay off the remaining outstanding principal balance under the 2018 Notes. At the closing, we received approximately $1.5 million from Hudson Bay. After closing and as of April 10, 2019, we have received approximately $2.9 million from Hudson Bay upon exercise of Series Q Warrants. On April 2, 2019, we sold an aggregate of $1.1 million of units to Hudson Bay as part of the April 2019 Offering. Hudson Bay purchased 5,573,935 primary units and 5,810,309 alternative units. As a result of the April 2019 Offering, Hudson Bay received an aggregate of 5,337,561 shares of our Common Stock, a Series R warrant to purchase 5,573,935 shares of our Common Stock, and a Series S warrant to purchase 236,374 shares of our Common Stock. Transactions with Intracoastal Capital We believe that Intracoastal Capital, LLC (“Intracoastal”) became, and currently is, a “related person” as a result of being the beneficial owner of more than 5% of our outstanding Common Stock when we entered into the transaction listed below. On April 2, 2019, we sold an aggregate of $1.0 million of units to Intracoastal as part of the April 2019 Offering. Intracoastal purchased 5,263,157 primary units and 5,263,157 alternative units. As a result of the April 2019 Offering, Intracoastal received an aggregate of 5,263,157 shares of our Common Stock, and a Series R warrant to purchase 5,263,157 shares of our Common Stock. Transaction with Iroquois We believe that Iroquois Master Fund, Ltd became a “related person” as a result of the transaction described below as a result of becoming the beneficial owner of more than 5% of our outstanding Common Stock. Insofar as we have been able to ascertain, as of April 29, 2019, Iroquois is not a “related person.” On January 2, 2018, we entered into a 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 agreed to (i) immediately terminate, and cease any and all solicitation and other efforts with respect to, the solicitation of proxies in opposition to our proposals for the 2017 annual meeting of shareholders, (ii) withdraw (and not resubmit) Iroquois’ proxy statement in opposition to our proposals for the 2017 annual meeting of shareholders, and (iii) promptly notify the staff of the SEC in writing that it is terminating the solicitation of proxies in opposition to the our proposals for the 2017 annual meeting of shareholders. Pursuant to the Cooperation Agreement, we issued to Iroquois Master Fund LTD and Iroquois Capital Investment Group LLC, 456,000 and 144,000 unregistered and restricted shares of Common Stock respectively as reimbursement for expenses incurred in connection with the 2017 annual meeting of shareholders and the negotiation, execution and effectuation of the Cooperation Agreement.
Transaction with Mobomo, LLC On May 23, 2017, the Company entered into an agreement with Mobomo, LLC for the design and development of certain intellectual property for a total fee of $516,000. The intellectual property consisted of an integrated mobile phone application and the new RGS 365™ customer portal. As of December 31, 2018, and April 10, 2019, the Company had paid an aggregate amount of $0.5 million. Mobomo’s Chief Executive Officer Brian Lacey is the son of the Company’s CEO Dennis Lacey. The Company approved the agreement in accordance with its related-party transaction policy. Our Policies Regarding Review, Approval or Ratification of Related-Party Transactions Any related-party transaction is reviewed by disinterested members of management and, if material, by disinterested members of the boardour Board of directorsDirectors or a committee thereof to ensure that the transaction reflects terms that are at least as favorable for us as we would expect in a similar transaction negotiated at arm’s length by unrelated parties. Our written policies regarding these related-party transactions are contained in our bylaws. Principal shareholdersEXPERTS
Ownership of Our Company
The following table sets forth certain information with respect to the beneficial ownership of our common stockfinancial statements as of Januaryand for the year ended December 31, 20082018 included in this Prospectus and in the Registration Statement have been so included in reliance on the report of BDO USA, LLP, an independent registered public accounting firm (the report on the financial statements contains an explanatory paragraph regarding the Company's ability to continue as adjusted to give effect toa going concern) appearing elsewhere herein and in the saleRegistration Statement, given on the authority of sharessaid firm as experts in auditing and accounting. The consolidated financial statements of ourReal Goods Solar, Inc. as of December 31, 2017, and for the year then ended, included in this prospectus have been so included in reliance on the report (which report expresses an unqualified opinion and includes an explanatory paragraph regarding going concern uncertainty) of Moss Adams LLP, an independent registered public accounting firm, given upon the authority of such firm as experts in accounting and auditing. LEGAL MATTERS The validity of the Class A common stock in this offering by: | Ø | | each person (or group of affiliated persons) who beneficially owned more than 5% of the outstanding shares of our common stock,
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| Ø | | each officer named in the Summary Compensation Table and
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| Ø | | all current directors and executive officers as a group.
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Except as otherwise noted in the footnotes below, each person or entity identified below has sole votingissued and investment power with respect to such securities. The information shown in the table below is based on no shares of our Class A common stock and 10,000,00 shares of our Class B common stock outstanding as of January 31, 2008 and shares of our Class A common stock and 10,000,000 shares of our Class B common stock outstanding after this offering. The percentage ownership information shown assumes noissuable upon exercise of the underwriters’ over-allotment optionWarrants will be passed upon for us by Brownstein Hyatt Farber Schreck, LLP, Denver, Colorado.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to “incorporate by reference” into this prospectus the information we file with the SEC, which means that we can disclose important information to you by referring you to other documents filed separately with the SEC. The information incorporated by reference is considered part of this prospectus, and any information that no person listed inwe file with the table below purchases sharesSEC subsequent to this prospectus and prior to the termination of our Class A common stockthe offerings referred to in this offering.prospectus will automatically be deemed to update and supersede this information. | | | | | | | | | | | | | | | | | | Prior to this Offering | | | After this Offering | | Title of Class | | Beneficial Owner | | Number of
Shares(2) | | Percent
of
Class(2) | | | Number of
Shares(2) | | Percent
of
Class(2) | | Class A | | Jirka Rysavy | | | | * | | | | | * | | | | John Schaeffer | | | | * | | | | | * | | | | Vilia Valentine | | | | * | | | | | * | | | | James Argyropoulos | | | | * | | | | | * | | | | Barbara Mowry | | | | * | | | | | * | | | | Ted Nark | | | | * | | | | | * | | | | All directors and officers as a group (six persons) | | | | * | | | | | * | | Class B | | Gaiam, Inc.(1)(3) | | 10,000,000 | | 100.0 | % | | 10,000,000 | | 100.0 | % |
(1)
| The address of Gaiam, Inc. is 360 Interlocken Boulevard, Broomfield, Colorado, 80021.
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(2)
| The numbers and percentages related to the Class A common stock shown include the shares of Class A common stock actually owned as of January 31, 2008 and the shares of Class A common stock that the identified person or group had the right to acquire within 60 days of such date. In calculating the percentage of ownership, all shares of Class A common stock that the identified person or group had the right to acquire within 60 days of January 31, 2008 upon the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage of the shares of Class A common stock owned by that person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of Class A common stock owned by any other person or group.
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(3)
| The shares of Class B common stock are convertible one-for-one into shares of Class A common stock at the option of the holder of shares of Class B common stock. Each holder of Class B common stock is entitled to ten votes on all matters submitted to a vote of shareholders. See “Description of Our Capital Stock.”
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Principal shareholders
OwnershipWe incorporate by reference all documents we subsequently file with the SEC (other than information furnished pursuant to Item 2.02 or Item 7.01 of GaiamForm 8-K or as otherwise permitted by Our Directors and Executive Officers
The following table sets forth certain information with respectSEC rules) pursuant to the beneficial ownershipSections 13(a), 13(c), 14 or 15(d) of the common stockExchange Act after the initial filing of Gaiam as of January 31, 2008 by (i) each director, (ii) each officer named in the Summary Compensation Table and (iii) all current directors and executive officers as a group. The information shown in the table below is based on 19,523,671 shares of Gaiam’s Class A common stock and 5,400,000 shares of Gaiam’s Class B common stock outstanding as of January 31, 2008. Except as otherwise noted in the footnotes below, each person identified below has sole voting and investment power with respect to such securities.
| | | | | | | | Title of Class | | Beneficial Owner(1) | | Number of
Shares(2) | | Percent of
Class | | Class A | | Jirka Rysavy(3)(4) | | 6,368,682 | | 25.5 | % | | | John Schaeffer(5) | | 15,100 | | * | | | | Vilia Valentine(6) | | 13,754 | | * | | | | James Argyropoulos(5)(6) | | 322,701 | | 1.7 | | | | Barbara Mowry | | 24,623 | | * | | | | Ted Nark(5) | | 21,787 | | * | | | | All directors and officers as a group (six persons) | | 6,766,647 | | 27.1 | | Class B | | Jirka Rysavy(4) | | 5,400,000 | | 100.0 | % |
(1)
| This table is based upon information supplied by officers, directors and principal shareholders or from Schedule 13Ds and 13Gs and Forms 3, 4 and 5 filed with the SEC. All beneficial ownership is direct, except as otherwise noted.
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(2)
| The numbers and percentages shown include the shares of Class A common stock actually owned as of January 31, 2008 and the shares of Class A common stock that the identified person or group had the right to acquire within 60 days of such date. In calculating the percentage of ownership, all shares of Class A common stock that the identified person or group had the right to acquire within 60 days of January 31, 2008 upon the exercise of options or warrants are deemed to be outstanding for the purpose of computing the percentage of the shares of Class A common stock owned by that person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of Class A common stock owned by any other person or group.
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(3)
| Includes 5,400,000 shares of Class A common stock of Gaiam issuable upon conversion of Class B common stock of Gaiam.
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(4)
| The address of Mr. Rysavy is 360 Interlocken Boulevard, Broomfield, Colorado, 80021.
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(5)
| Includes the following shares issuable upon the exercise of stock options which can be exercised within 60 days of January 31, 2008: Mr. Schaeffer, 7,600; Ms. Valentine, 12,600; Mr. Argyropoulos, 10,000 and Mr. Nark, 10,000.
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(6)
| Includes 303,333 shares of Class A common stock of Gaiam held by Argyropoulos Investors, of which Mr. Argyropoulos is a principal.
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Description of our capital stock
General
Although we believe the following summary description of our capital stock, our articles of incorporation and our bylaws covers all material provisions affecting the rights of holders of our capital stock, this summary is not intended to be complete and is qualified by reference to the provisions of applicable law and to our articles of incorporation and bylaws, both of which are included as exhibits to the registration statement of which this prospectus is a part.
Our authorized capital stock is 250,000,000 shares and consists of 150,000,000 shares of Class A common stock, $.0001 par value per share; 50,000,000 shares of Class B common stock, $.0001 par value per share; and 50,000,000 shares of preferred stock, par value $.0001 per share. Following this offering we expectpart (including prior to have outstanding shares of Class A common stock, and 10,000,000 shares of Class B common stock. There will be no shares of preferred stock outstanding. Prior to this offering, the shares of our Class B common stock were held by Gaiam, and Gaiam will continue to hold those shares following this offering. Following this offering, we expect to have 1,000,000 shares of Class A common stock reserved for issuance upon the exercise of options and 70,000 shares of Class A common stock reserved for issuance upon the exercise of warrants.
Gaiam owns all of our Class B common stock. The Class B common stock may be transferred by the holder thereof except that we will not effect such transfer unless such holder shall have elected in writing either (i) to transfer such shares as shares of Class B common stock or (ii) to convert such shares into shares of Class A common stock simultaneously with such transfer. No change in control, merger, consolidation, reorganization or similar transaction affecting a holder of the Class B common stock that is a corporation or partnership shall be deemed to be a transfer of the shares of Class B common stock. The shares of Class B common stock are convertible one-for-one into shares of Class A common stock, at the option of the holder of the shares of Class B common stock.
Our board of directors is authorized, subject to any limitations prescribed by Colorado law, to issue at any time up to 50,000,000 shares of preferred stock. The board may provide for the issuance of the preferred stock in one or more series or classes with designations, preferences, limitations and relative rights determined by the board without any vote or action by the shareholders, although the board may not issue voting preferred stock without the consent or approval of a majority of the Class B common stock. As a result, the board has the power to issue preferred stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of the common stock. Although we have no current plans to issue any preferred stock, the issuance of preferred stock or of rights to purchase preferred stock could have the effect of making it more difficult for a third party to acquire us, or of discouraging a third party from attempting to acquire us. Such an issuance could also dilute the voting power or other incidents of ownership of holders of our common stock.
Voting Rights
Each holder of shares of Class A common stock is entitled to one vote for each share held on all matters submitted to a vote of shareholders. Each share of Class B common stock is entitled to ten votes on all matters submitted to a vote of shareholders. There are no cumulative voting rights. All holders of shares of Class A common stock and shares of Class B common stock vote as a single group on all matters that are submitted to the shareholders for a vote. Accordingly, holders of a majority of the shares of Class A common stock and shares of Class B common stock entitled to vote in any election of directors may elect all of the directors who stand for election. A required number of shareholders having the minimum number of votes that would be necessary to authorize or take action at a meeting at which all of the shares entitled to vote thereon were present and voted may consent to an action in writing and without a meeting under certain circumstances.
Description of our capital stock
Dividends and Liquidation
Shares of Class A common stock and shares of Class B common stock are entitled to receive dividends, if any, as may be declared by the board of directors out of legally available funds. In the event of a liquidation, dissolution or winding up of our company, the shares of Class A common stock and shares of Class B common stock are entitled to share ratably in our assets remaining after the payment of all of our debts and other liabilities. Holders of shares of Class A common stock and shares of Class B common stock have no preemptive, subscription or redemption rights, and there are no redemption or sinking fund provisions applicable to the shares of Class A common stock and Class B common stock.
Anti-Takeover Effects of Our Articles of Incorporation and Bylaws
The following provisions, which are contained in our articles of incorporation or bylaws, could have the effect of delaying, deferring or preventing a change in control of our company.
Our articles of incorporation and bylaws provide that our board may consist of any number of directors, which may be fixed from time to time by our board. Newly created directorships resulting from any increase in our authorized number of directors may be filled by the affirmative vote of a majority of the directors then in office or by an election at an annual meeting or special meeting of shareholders called for that purpose, and any vacancies on our board resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled a majority of our board then in office, even if less than a quorum is remaining in office.
Our articles of incorporation provide that shareholders holding the required number of shares may consent to an action in writing without the need to hold a meeting. More specifically, the articles of incorporation provide that any action that is required or permitted under Articles 101 to 117 of the Colorado Business Corporation Act or under our articles of incorporation to be taken at a meeting of shareholders may be taken without a meeting if shareholders that sign the written consent hold not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all of the shares entitled to vote thereon were present and voted.
Our bylaws require advance notice by a shareholder of any proposal to be brought before an annual meeting of shareholders by a shareholder, including any nomination for election of directors by any shareholder entitled to vote for the election of directors at the meeting.
Each holder of our Class A common stock has one vote on all matters submitted to shareholders for each share of Class A common stock standing in the name of such holder on our books. Each holder of our Class B common stock has ten votes on all matters submitted to shareholders for each share of Class B common stock. Except as otherwise provided in our articles of incorporation or as otherwise provided by law, all shares of our common stock entitled to vote will vote as a single class on all matters submitted to the shareholders. We may not issue any additional shares of Class B common stock (except in connection with stock splits and stock dividends) and the rights of the holders of Class B common stock may not be amended except by the affirmative vote of the holders of a majority of the voting power of the shares of Class A common stock and of Class B common stock entitled to vote, each voting separately as a class. After this offering, Gaiam will hold 100% of our Class B common stock. Cumulative voting in the election of directors is not permitted under our articles of incorporation or bylaws.
Subject to repeal or change by action of our shareholders, our board may amend, supplement or repeal our bylaws or adopt new bylaws.
Description of our capital stock
Registration Rights
Under a Registration Rights Agreement that we will enter into on or before the commencement of this offering, the holder of our Class B common stock (or its permitted transferee) will have the right to require us to register with the SEC all or any portion of the shares of Class B common stock or the Class A common stock into which such Class B common stock may be converted so that those shares may be publicly resold, or to include such shares in any registration statement we file, subject to certain exceptions, conditions and limitations, including a lock-up agreement with the underwriters. These rights include demand registration rights, Form S-3 registration rights and “piggyback” registration rights, in each case on and subject to the terms and conditions identified in the Registration Rights Agreement. We will generally pay all expenses, other than underwriting discounts and commissions, relating to all demand registrations, Form S-3 registrations and piggyback registrations. These registration rights terminate upon the earlier of either years following the completion of this offering or as to a given holder of registrable securities, when such holder of registrable securities can sell all of such holder’s registrable securities during any 90-day period pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended, or the Securities Act, or pursuant to another similar exception. However, if a holder owns more than 10% of our outstanding securities, such holder shall continue to have registration rights beyond the -year limitation until such time as all of the holder’s securities may be sold pursuant to Rule 144(k) or such holder owns less than 10% of our outstanding securities. The resale of these shares in the public market upon exercise of those registration rights could adversely affect the market price of our common stock. The foregoing description of the Registration Rights Agreement is qualified in its entirety by reference to the Registration Rights Agreement.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be Computershare Trust Company.
Listing
We intend to apply to have our Class A common stock included for quotation on the Nasdaq Global Market under the symbol “RSOL.”
Shares eligible for future sale
Prior to this offering, no public market existed for our Class A common stock. Market sales of shares of our Class A common stock after this offering and from time to time, and the availability of shares for future sale, may reduce the market price of our Class A common stock. Sales of substantial amounts of our Class A common stock, or the perception that these sales could occur, could adversely affect prevailing market prices for our Class A common stock and could impair our future ability to obtain capital, especially through an offering of equity securities. We are unable to estimate the number of shares that may be sold in the future or the effect, if any, that such sales of shares will have on the market price of our Class A common stock.
Upon the completion of this offering, we will have shares of Class A common stock outstanding (assuming no exercise of the underwriters’ over-allotment option), and 10,000,000 shares of Class B common stock outstanding that is held by Gaiam and that is convertible into 10,000,000 shares of Class A common stock. All of the shares of Class A common stock sold in this offering will be freely tradable under the Securities Act, unless purchased by our “affiliates,” as defined in Rule 144, which would be subject to the limitations and restrictions described below.
Our directors, executive officers and certain shareholders who hold either securities or who hold securities under one or more of our stock plans have agreed with the underwriters not to directly or indirectly, offer to sell, contract to sell, sell or otherwise dispose of any Class A common stock or any securities convertible into or exercisable or exchangeable for Class A common stock without the prior written consent of ThinkEquity Partners LLC for a period of 180 days after the date of this prospectus ( , 2008). Gaiam has agreed to the same lock-up agreement related to our Class A and Class B common stock for a period of 270 days after the date of this prospectus ( , 2008). Upon the expiration of these lock-up agreements, all of the shares of Class A common stock owned by these shareholders, will become eligible for sale, subject to compliance with Rule 144 of the Securities Act as described below.
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned restricted stock for at least six months, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the number of shares of Class A common stock then outstanding ( shares immediately after this offering or if the underwriters’ over-allotment is exercised in full) or (ii) the average weekly trading volume of our Class A common stock on the Nasdaq Global Market during the four calendar weeks immediately preceding the date on which the notice of sale is filed with the SEC. Sales pursuant to Rule 144 are subject to requirements relating to manner of sale, notice and availability of current public information about us. A person (or persons whose shares are aggregated) who is not deemed to be an affiliate of ours for 90 days preceding a sale, and who has beneficially owned restricted stock for at least one year is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 144 will not be available to any shareholders until we have been subject to the reporting requirements of the Exchange Act for 90 days.
In addition, employees of ours who hold outstanding shares of Class A common stock or options to acquire shares of Class A common stock are entitled to rely on the resale provisions of Rule 701, which permits non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permit affiliates to sell Rule 701 shares without having to comply with Rule 144’s holding period restrictions, in each case commencing 90 days after the date of completion of this offering.
We intend to file with the SEC a registration statement on Form S-8 under the Securities Act covering the shares of Class A common stock subject to outstanding stock options granted under the Incentive Plan, as well as the shares of Class A common stock reserved for issuance pursuant to the Incentive Plan. The registration statement is expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statement will, subject to Rule 144 volume limitations applicable to affiliates and the lock-up agreements described above, be available for sale in the open market.
Shares eligible for future sale
Upon the completion of this offering, Gaiam, as the holder of our Class B common stock, or its transferee, will be entitled to rights with respect to the registration of its shares of common stock under the Securities Act, subject to the terms of the lock-up agreement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration subjectstatement) and prior to the lock-up agreements described above. See “Description of our Capital Stock—Registration Rights.”
Material U.S. federal income tax consequences to non-U.S.
shareholders
The following is a general discussiontermination of the material U.S. federal income tax consequences ofoffering. Any documents that we subsequently file with the purchase, ownershipSEC will automatically update and disposition of shares of our Class A common stock by a non-U.S. shareholder. For purposes of this discussion, a non-U.S. shareholder is a beneficial owner of our Class A common stock who is treated for U.S. federal tax purposes as:
| Ø | | a non-resident alien individual,
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| Ø | | a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized under the laws of a jurisdiction other than the U.S. or any state or political subdivision thereof,
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| Ø | | an estate, other than an estate the income of which is subject to U.S. federal income taxation regardless of its source or
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| Ø | | a trust, other than a trust that (i) is subject to the primary supervision of a court within the United Statessupersede the information previously filed with the SEC and which has one or more U.S. fiduciaries who have the authority to control all substantial decisions of the trust, or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
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A beneficial owner who is a partner in a partnership or other flow-through entity that holds our Class A common stock should consult its own tax advisor regarding the U.S. federal income tax consequences of the purchase, ownership and disposition of our Class A common stock.
This summary assumes that our Class A common stock is held as a capital asset (generally, property held for investment). The discussion does not address all of the U.S. federal income tax considerations that may be relevant to a non-U.S. shareholder in light of its particular circumstances or to non-U.S. shareholders that may be subject to special treatment under U.S. federal tax laws, such as persons subject to special tax rules (such as, financial institutions, insurance companies, broker-dealers, partnerships, and tax-exempt organizations) or persons that will hold our Class A common stock as part of a straddle, hedge, conversion, constructive sale, or other integrated security transaction for U.S. federal income tax purposes, all of whom may be subject to tax rules that differ significantly from those discussed below. In addition, this discussion does not address any (i) U.S. federal income tax consequences to a non-U.S. shareholder that (A) is a nonresident alien individual present in the United States for 183 or more days during the taxable year or (B) is subject to provisions of the Internal Revenue Code applicable to U.S. expatriates, and (ii) state, local, or foreign tax considerations. This summary is based on current provisions of the Internal Revenue Code, Treasury regulations, judicial opinions, published positions of the Internal Revenue Service, or IRS, and other applicable authorities, all of which are subject to change, possibly with retroactive effect.Each prospective purchaser of our Class A common stock is advised to consult a tax advisor with respect to the U.S. federal, state, local or non-U.S. tax consequences of acquiring, holding and disposing of our Class A common stock.
Dividends
Although we do not expect to pay any cash dividends in the foreseeable future on our Class A common stock, any dividend paid to a non-U.S. shareholder with respect to our Class A common stock generally will be subject to withholding tax at a 30% rate (or such lower rate specified by an applicable income tax treaty). Generally, a non-U.S. shareholder must certify as to its status, and to any right to reduced withholding under an applicable income tax treaty, on a properly completed IRS Form W-8BEN in order to obtain the benefit of such right. If, however, the non-U.S. shareholder provides an IRS Form W-8ECI,
Material U.S. federal income tax consequences to non-U.S. shareholders
certifying that the dividend is effectively connected with the non-U.S. shareholder’s conduct of a trade or business within the United States, the dividend will not be subject to withholding. Instead, such dividends are subject to U.S. federal income tax at regular rates applicable to U.S. persons generally and, for corporate holders, may also be subject to “branch profits tax.”
Sale or Disposition of our Class A Common Stock
A non-U.S. shareholder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of our Class A common stock unless (i) such gain is effectively connected with the non-U.S. shareholder’s conduct of a U.S. trade or business or (ii) we are or become a U.S. real property holding corporation, or USRPHC, for U.S. federal income tax purposes. We do not believe that we are or will become a USRPHC.
Information Reporting and Backup Withholding
In general, backup withholding will not apply to dividends on our Class A common stock paid by us or our paying agents, in their capacities as such, to a non-U.S. shareholder if the holder has provided the required certification that such holder is a non-U.S. shareholder and neither we nor our paying agents have actual knowledge or reason to know otherwise. In addition, backup withholding will generally not apply to proceeds derived from the sale of our Class A common stock paid to a non-U.S. shareholder if the holder has provided the required certification that such holder is a non-U.S. shareholder and the paying agent does not have actual knowledge or reason to know otherwise.
Generally, we must report to the IRS the amount of dividends paid, the name and the address of the recipient, and the amount, if any, of tax withheld. This information reporting requirement will apply even if no tax was requiredconsidered to be withheld.
Any amounts withheld under the backup withholding rules from a payment to a non-U.S. shareholder may be refunded, or credited against the holder’s U.S. federal income tax liability, provided that certain required information is provided to the IRS.
Underwriting
ThinkEquity Partners LLC is acting as bookrunning lead manager of this offering and as representative of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated as of the datepart of this prospectus each underwriter named below has agreed to purchase, and we have agreed to sell to that underwriter, the number of the shares of our Class A common stock set forth opposite the underwriter’s name.
| | | Underwriter
| | Number of
Shares | ThinkEquity Partners LLC
| | | Canaccord Adams Inc.
| | | Broadpoint Capital, Inc.
| | | | | | Total
| | | | | |
The underwriting agreement provides that the obligations of the underwriters to purchase shares of our Class A common stock included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares, other than those covered by the over-allotment option described below, if they purchase any of the shares. The obligation of the underwriters to purchase the shares is several and not joint meaning that, subject to the terms of the underwriting agreement, each underwriter is obligated to purchase only the number of shares set forth opposite its name.
The underwriters have advised us that they propose to offer the shares of our Class A common stock initially to the public at $ per share. The underwriters propose to offer the shares to certain dealers at the same price less a concession of not more than $ per share. The underwriters may allow, and the dealers may reallow, a concession of not more than $ per share. If all the shares are not sold at the initial offering price, the representatives may change the offering price and other selling terms.
We have granted to the underwriters an over-allotment option to purchase up to an additional shares of our Class A common stock from us at the same price as to the public, and with the same underwriting discount, as set forth on the front cover of this prospectus. The underwriters may exercise this option any time during the 30-day period after the date of this prospectus, but only to cover over-allotments, if any. To the extent the underwriters exercise the option, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares as it was obligated to purchase under the underwriting agreement.
We and each of our officers and directors have agreed not to offer to sell, sell, pledge or otherwise dispose of (or enter into any transaction or device that is designed to, or could be expected to, result in the disposition by any person at any time in the future of), directly or indirectly, any shares of our Class A common stock or any securities convertible into or exchangeablethose documents are filed. Thus, for our Class A common stock, or enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic consequences of ownership of our Class A common stock, whether any transaction is to be settled by delivery of Class A common stock or other securities, in cash or otherwise, without the prior written consent of ThinkEquity Partners LLC for a period of 180 days after the date of this prospectus. Gaiam has agreed to the same lock-up agreement related to our Class A or Class B common stock for a 270-day period after the date of this prospectus. Notwithstanding the foregoing, for the purpose of allowing the underwriters to comply with FINRA Rule 2711(f)(4), if (1) during the last 17 days of the initial applicable lock-up period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the initial applicable lock-up period, we announce that we will release earnings results during the
Underwriting
16-day period beginning on the last day of the initial applicable lock-up period, then in each case the initial applicable lock-up period will be extended until the expiration of the 18-day period beginning on the date of release of the earnings results or the occurrence of the material news or material event, as applicable.
The restrictions described in this paragraph do not apply to:
| Ø | | the sale of shares to the underwriters,
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| Ø | | transactions by any person other than us relating to shares purchased in this offering,
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| Ø | | the issuance by us of shares of our Class A common stock pursuant to our employee benefit plans and non-employee directors benefit plans described in this prospectus,
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| Ø | | the issuance by us of shares of our Class A common stock upon the exercise of an option or the conversion of a security outstanding on the date of this prospectus of which the underwriters have been advised in writing,
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| Ø | | the issuance by us of stock options; provided that such options do not become exercisable or vest during such 180-day period, and the issuance of options (and our shares upon the exercise of such options) under our employee benefit plans and non-employee directors benefit plans described in this prospectus,
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| Ø | | transfers of shares of Class A common stock or any security convertible into Class A common stock as a bona fide gift or
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| Ø | | the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of Class A common stock, provided that such plan does not provide for the transfer of Class A common stock during the restricted period;
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provided thatexample, in the case of any gift, (i) each doneea conflict or distributee shall sign and deliver a lock-up letter containing substantially the same restrictions as described herein, and (ii) no filing under Section 16(a) of the Exchange Act, reporting a reduction in beneficial ownership of shares of Class A common stock, shall be required or shall be voluntarily made during the restricted period referred to in the foregoing sentence.
We intend to apply to have our Class A common stock included for quotation on the Nasdaq Global Market under the symbol “RSOL.”
The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering assuming both no exercise and full exercise of the underwriters’ over-allotment option.
| | | | | | | | | No Exercise | | Full
Exercise | Per Share
| | $ | | | $ | | Total
| | $ | | | $ | |
In connection with this offering, the underwriters may purchase and sell shares of our Class A common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of shares of our Class A common stock in excess of the number of shares to be purchased by the underwriters in this offering, which creates a syndicate short position. “Covered” short sales are sales of shares made in an amount up to the number of shares represented by the underwriters’ over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the
Underwriting
over-allotment option. Transactions to close out the covered syndicate short positions involve either purchases of the Class A common stock in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters may also make “naked” short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of our Class A common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while this offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the underwriters repurchase shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a decline in the market price of our Class A common stock. They may also cause the price of our Class A common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the Nasdaq Global Market or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.
In connection with this offering, the underwriters and selling group members may engage in passive market making transactions in the Class A common stock on the Nasdaq Global Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act, during the period before the commencement of offers or sales of our Class A common stock and extending through the completion of distribution. A passive market maker must display its bids at a price not in excess of the highest independent bid of the security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must be lowered when specified purchase limits are exceeded.
We estimate that our portion of the total expenses of this offering, exclusive of underwriting discounts and commissions, will be approximately $ .
A prospectus in electronic format may be made available by one or more of the underwriters on a website maintained by a third-party vendor or by one or more of the underwriters. The representatives of the underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. The representatives will allocate shares to underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.
Other than the prospectus in electronic format, theinconsistency between information on such website is not part of the prospectus.
We and the underwriters have each agreed to indemnify the other against certain liabilities, including liabilities under the Securities Act, or to contribute to payments an indemnified party may be required to make because of any of those liabilities.
Pricing of the Offering
Prior to this offering, there has been no public trading market for the shares of our Class A common stock. The initial public offering price was determined by negotiations between us and the representatives of the underwriters. Among the factors considered in determining the initial public offering price, in addition to prevailing market conditions, were our future prospects and those of our industry in general, our sales, earnings and other financial operating information in recent periods, an assessment of our management, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to ours.
Underwriting
Certain of the underwriters and their respective affiliates may perform various financial advisory and investment banking services for us or Gaiam, for which they may receive customary fees and expenses.
Notice to Prospective Investors in the European Economic Area
In relation to each member state of the European Economic Area that has implemented the Prospectus Directive (each, a relevant member state), with effect from and including the date on which the Prospectus Directive is implemented in that relevant member state (the relevant implementation date), an offer of shares of our Class A common stock describedset forth in this prospectus may not be made to the public in that relevant member state prior to the publication of aand information incorporated by reference into this prospectus, in relation to our Class A common stock that has been approved by the competent authority in that relevant member state or, where appropriate, approved in another relevant member state and notified to the competent authority in that relevant member state, all in accordance with the Prospectus Directive, except that, with effect from and including the relevant implementation date, an offer of securities may be made to the public in that relevant member state at any time
| Ø | | to any legal entity that is authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities, or
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| Ø | | to any legal entity that has two or more of (i) an average of at least 250 employees during the last financial year; (ii) a total balance sheet of more than€43,000,000 and (iii) an annual net turnover of more than€50,000,000, as shown in its last annual or consolidated accounts or
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| Ø | | in any other circumstances that do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive.
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For purposes of this provision, the expression an “offer to the public” in any relevant member state means the communication to 100 or more persons, other than qualified investors, in any form and by any means of sufficient informationyou should rely on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe to the securities, as the expression may be varied in that member state by any measure implementing the Prospectus Directive in that member state, and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state.
Each purchaser of shares of our Class A common stock described in this prospectus located within a relevant member state will be deemed to have represented, acknowledged and agreed that it is a “qualified investor” within the meaning of Article 2(1)(e) of the Prospectus Directive.
The sellers of shares of our Class A common stock have not authorized and do not authorize the making of any offer of shares of our Class A common stock through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of shares of our Class A common stock as contemplated in this prospectus. Accordingly, no purchaser of shares of our Class A common stock, other than the underwriter, is authorized to make any further offer of shares of our Class A common stock on behalf of the underwriter.
Notice to Prospective Investorsinformation contained in the United Kingdomdocument that was filed later.
This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors (as defined above) that are also investment professionals falling within Article 19(5)part of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or Order, (ii) high net worth entities falling within Article 49(2) of the Order, or (iii) other persons to whom it may lawfully be communicated (all such persons together being referred to as “relevant persons”). This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a relevant person should not act or rely on this document or any of its contents. Legal matters
The validity of the shares of Class A common stock being offered by this prospectus will be passed upon for us by Bartlit Beck Herman Palenchar & Scott LLP, Denver, Colorado. Certain legal matters will be passed upon for the underwriters by Greenberg Traurig, LLP, Phoenix, Arizona.
Experts
Ehrhardt Keefe Steiner & Hottman PC, independent registered public accounting firm, has audited our consolidated financial statements for the years ended December 31, 2005, December 31, 2006 and December 31, 2007, as set forth in their report, which is included in this prospectus. We have included our consolidated financial statements in this prospectus and elsewhere in the registration statement in reliance on Ehrhardt Keefe Steiner & Hottman PC’s report, given on their authority as experts in accounting and auditing.
Ehrhardt Keefe Steiner & Hottman PC, independent registered public accounting firm, has audited the statements of operations and cash flows of Marin Solar, Inc. for the ten months ended October 31, 2007 and the balance sheet as of December 31, 2006 and for the year then ended. Ehrhardt Keefe Steiner & Hottman PC has also audited the consolidated balance sheets and statements of operations and cash flows of Carlson Solar as of and for the years ended December 31, 2006 and December 31, 2007, as set forth in their reports, which are included in this prospectus. We have included Marin Solar’s balance sheet, statements of operations and cash flows and Carlson Solar’s balance sheets, statements of operations and cash flows in this prospectus and elsewhere in the registration statement in reliance on Ehrhardt Keefe Steiner & Hottman PC’s reports, given on their authority as experts in accounting and auditing.
Where you can find more information
We have filed with the SEC a registration statement on Form S-1 of which this prospectus is a part, underthat we have filed with the Securities Act with respectSEC relating to our Class A common stock beingthe Common Stock offered by this prospectus. ThisAs permitted by SEC rules, this prospectus does not contain all of the information included in the registration statement and the accompanying exhibits and schedules we file with the SEC. We have filed certain legal documents that control the terms of the Common Stock offered by this prospectus as exhibits to the registration statement. We may file certain other legal documents that control the terms of the Common Stock offered by this prospectus as exhibits to reports we file with the SEC. You may refer to the registration statement and the exhibits and financial statements included with the registration statement. For furtherschedules for more information with respect toabout us and the Class A common stock offered by this prospectus, we refer you to theour securities. The registration statement and its exhibits. References in this prospectus to any of our contracts, agreements or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contracts, agreements or documents. Each of these statements is qualified in all respects by this reference. You may read and copy the registration statement, the related exhibits and other material we file with the SECschedules are also available at the SEC’s public reference room in Washington, D.C. at 100 F Street, Room 1580, N.E., Washington, D.C. 20549. You can also request copies of those documents, upon payment of a prescribed duplicating fee, by writing to the Public Reference Section of the SEC at 100 F Street NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The SEC also maintains an Internet website that contains reports, proxyRoom or through its website.
We will provide, without charge and information statements and other information regarding issuers that file electronically with the SEC. The SEC’s website address iswww.sec.gov. You may alsoupon oral or written request, to each person, including any beneficial owner, to whom a copy of this prospectus has been delivered, a copy of any of the documents referred to above as being incorporated by reference into this prospectus but not delivered with it. You may obtain a copy of these filings, at no cost, by writing or calling us at 360 Interlocken Boulevard, Broomfield,Real Goods Solar, Inc., 110 16th Street, 3rd Floor, Denver, Colorado 80021 or80202, (303) 222-8300. Exhibits to the filings will not be provided, however, unless those exhibits have been specifically incorporated by telephoningreference in this prospectus. WHERE YOU CAN FIND MORE INFORMATION This prospectus, which constitutes a part of a registration statement on Form S-1 that we have filed with the SEC, omits certain of the information set forth in the registration statement. Accordingly, you should refer to the registration statement and its exhibits for further information with respect to us at (303) 222-8400. Upon the effectivenessand our Common Stock. Copies of the registration statement and its exhibits are on file at the offices of the SEC. This prospectus contains statements concerning documents filed as exhibits. For the complete text of any of these documents, we will be subjectrefer you to the information and reporting requirementscopy of the Exchange Act,document filed as an exhibit to the registration statement.
We file annual, quarterly and we will file periodiccurrent reports, proxy and information statements and other information with the SEC. Such periodic reports, proxy andThe SEC maintains a website that contains information statements and other informationwe file electronically with the SEC, which you can be inspected and copiedaccess over the Internet at the locations set forth above.http://www.sec.gov. We intend to issue to our shareholders annual reports, which will include audited financial statements and a report of our independent auditors with respect to the examination of such financial statements. In addition, we will issue such other interim reports as we deem appropriate. We also maintain a website atwww.realgoodssolar.com, at which you http://www.rgsenergy.com with information about our company. You may access these materials freecopies of charge as soon as reasonably practicable after they are electronically filed with,the documents incorporated by reference into this prospectus. Information contained on our website or furnished to, the SEC. The information contained in, or that can be accessed through, ourany other website is not incorporated into this prospectus and does not constitute a part of this prospectus. Our website address referenced above is intended to be an inactive textual reference only and not an active hyperlink to our website. Index to consolidated financial statementsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Index to consolidated financial statements | | | | | Page | Real Goods Solar, Inc. Financial Statements
| | | ReportReports of independent registered public accounting firmfirms
| F-2 | | Real Goods Solar, Inc. Consolidated Financial Statements: | | F-2 | Consolidated balance sheets as of December 31, 2006 and 2007 | | F-3F-4 | Consolidated statements of operations for the years ended December 31, 2005, 2006, and 2007 | | F-4F-5 | Consolidated statementstatements of changes in shareholders’ equity for the years ended December 31, 2005, 2006, and 2007 | | F-5F-6 | Consolidated statements of cash flows for the years ended December 31, 2005, 2006, and 2007 | | F-6F-7 | Notes to consolidated financial statements | | F-7 | Financial Statement Schedule II – Consolidated valuation and qualifying accounts for the years ended December 31, 2005, 2006, and 2007F-8
| | F-18 | | | Marin Solar, Inc. Financial Statements
| | | Independent auditors’ report
| | F-19 | Balance sheet as of December 31, 2006
| | F-20 | Statements of operations for the year ended December 31, 2006 and the ten months ended October 31, 2007
| | F-21 | Statement of changes in shareholders’ deficit for the year ended December 31, 2006
| | F-22 | Statements of cash flows for the year ended December 31, 2006 and the ten months ended October 31, 2007
| | F-23 | Notes to financial statements
| | F-24 | | | Carlson Solar Financial Statements
| | | Independent auditors’ report
| | F-31 | Balance sheets as of December 31, 2006 and 2007
| | F-32 | Statements of operations for the years ended December 31, 2006 and 2007
| | F-33 | Statement of changes in shareholders’ equity for the years ended December 31, 2006 and 2007
| | F-34 | Statements of cash flows for the years ended December 31, 2006 and 2007
| | F-35 | Notes to financial statements
| | F-36 |
Report of independent registered public accounting firmIndependent Registered Public Accounting Firm The
Shareholders and Board of Directors and Shareholders Real Goods Solar, Inc. Denver, Colorado Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Real Goods Solar, Inc. (the “Company”) and subsidiaries as of December 31, 2006 and 2007, and2018, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the periodyear ended December 31, 2007. Our audits also included2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial statement schedule II for eachposition of the three years inCompany and subsidiaries at December 31, 2018, and the periodresults of their operations and their cash flows for the year ended December 31, 2007. 2018, in conformity with accounting principles generally accepted in the United States of America. Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations and has an accumulated deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits we are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. AnAccordingly, we express no such opinion. Our audit includesincluded performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. AnOur audit also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion. The
/s/ BDO USA, LLP We have served as the Company's auditor since 2018. Dallas, Texas April 15, 2019
Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Real Goods Solar, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheetssheet of Real Goods Solar, Inc. (the “Company”) as of December 31, 2006 and 2007 and2017, the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years inyear then ended, and the period ended December 31, 2007 were prepared forrelated notes (collectively referred to as the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the registration statement on Form S-1 of Real Goods Solar, Inc.“consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Real Goods Solar, Inc.the Company as of December 31, 2006 and 2007,2017, and the consolidated results of theirits operations and theirits cash flows for each of the three years in the periodyear then ended, December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in our opinion,Note 1 to the relatedconsolidated financial statement schedule IIstatements, the Company has suffered recurring losses from operations and has an accumulated deficit as of December 31, 2017 that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for eachOpinion These consolidated financial statements are the responsibility of the three yearsCompany’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the period ended December 31, 2007, when considered in relation toconsolidated financial statements. Our audit also included evaluating the basicaccounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements taken asstatements. We believe that our audit provides a whole, presents fairly in all material respects the information set forth therein.reasonable basis for our opinion. /s/ Ehrhardt Keefe Steiner & Hottman PCMoss Adams LLP February 1, 2008
Denver, Colorado April 2, 2018, except for the reclassification adjustments applied to the 2017 financial statements as described under the headingDiscontinued Operations in Note 2 as to which the date is April 15, 2019. We have served as the Company’s auditor from 2017 to 2018.
REAL GOODS SOLAR, INC. Consolidated balance sheets
Consolidated Balance Sheets | | | | | | | | | | | | As of December 31, | | | (in thousands, except share and per share data) | | 2006 | | | 2007 | | | ASSETS | | | | | | | | | Current assets: | | | | | | | | | Cash and cash equivalents | | $ | 248 | | | $ | 542 | | Accounts receivable, net | | | 2,876 | | | | 3,632 | | Inventory | | | 2,671 | | | | 2,454 | | Deferred costs on uncompleted contracts | | | 226 | | | | 992 | | Deferred advertising costs | | | 257 | | | | 277 | | Deferred tax assets | | | 12 | | | | 154 | | Other current assets | | | 77 | | | | 19 | | | | | | | | | | | Total current assets | | | 6,367 | | | | 8,070 | | Property and equipment, net | | | 4,231 | | | | 4,382 | | Goodwill and other intangibles, net | | | 2,759 | | | | 6,094 | | Deferred tax assets | | | 2,684 | | | | 2,324 | | Other assets | | | — | | | | 116 | | | | | | | | | | | Total assets | | $ | 16,041 | | | $ | 20,986 | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 177 | | | $ | 1,275 | | Accrued liabilities | | | 21 | | | | 421 | | Deferred revenue on uncompleted contracts | | | 376 | | | | 1,354 | | Payable to Gaiam | | | 13,919 | | | | 16,286 | | | | | | | | | | | Total current liabilities | | | 14,493 | | | | 19,336 | | | | | | | | | | | Commitments and contingencies | | | | | | | | | 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; no shares issued and outstanding | | | — | | | | — | | Class B common stock, par value $.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding | | | — | | | | — | | Additional paid-in capital | | | 2,150 | | | | 2,150 | | Accumulated deficit | | | (602 | ) | | | (500 | ) | | | | | | | | | | Total shareholders’ equity | | | 1,548 | | | | 1,650 | | | | | | | | | | | Total liabilities and shareholders’ equity | | $ | 16,041 | | | $ | 20,986 | | | | | | | | | | |
| | | As of December 31, | | | (in thousands, except share and per share data) | | 2018 | | | 2017 | | | ASSETS | | | | | | | | Current assets: | | | | | | | | | | Cash | | $ | 5,831 | | | $ | 1,170 | | | Accounts receivable, net | | | 1,340 | | | | 2,787 | | | Costs in excess of billings | | | 11 | | | | 62 | | | Inventory, net | | | 1,595 | | | | 2,013 | | | Deferred costs on uncompleted contracts | | | 236 | | | | 615 | | | Other current assets | | | 1,613 | | | | 1,987 | | | Total current assets | | | 10,626 | | | | 8,634 | | | Property and equipment, net | | | 778 | | | | 1,154 | | | POWERHOUSE™ license, net | | | 3,202 | | | | 1,114 | | | Goodwill | | | - | | | | 1,338 | | | Net investment in sales-type leases and other assets | | | 1,654 | | | | 2,018 | | | Total assets | | $ | 16,260 | | | $ | 14,258 | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | Current liabilities: | | | | | | | | | | Convertible debt, net | | | 336 | | | | 1 | | | Accounts payable | | | 862 | | | | 1,657 | | | Accrued liabilities | | | 1,571 | | | | 1,474 | | | Deferred revenue and other current liabilities | | | 956 | | | | 1,810 | | | Total current liabilities | | | 3,725 | | | | 4,942 | | | Other liabilities | | | 1,242 | | | | 3,074 | | | Common stock warrant liabilities | | | 511 | | | | 76 | | | Total liabilities | | | 5,478 | | | | 8,092 | | | Commitments and contingencies (Note 7) | | | | | | | | | | 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;91,859,638 and 8,151,845 shares issued and outstanding at December 31, 2018 and 2017, respectively | | | 17 | | | | 8 | | | Class B common stock, par value $.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | | | Additional paid-in capital | | | 253,331 | | | | 206,640 | | | Accumulated deficit | | | (242,566 | ) | | | (200,482 | ) | | Total shareholders’ equity | | | 10,782 | | | | 6,166 | | | Total liabilities and shareholders’ equity | | $ | 16,260 | | | $ | 14,258 | |
See accompanying notes to consolidated financial statements.
REAL GOODS SOLAR, INC. Consolidated Statements of Operations | | | For the years ended December 31, | | | (in thousands, except per share data) | | 2018 | | | 2017 | | | Contract revenue: | | | | | | | | | | Sale and installation of solar energy systems | | $ | 11,511 | | | $ | 14,030 | | | Service | | | 1,159 | | | | 1,509 | | | Leasing, net | | | 59 | | | | 53 | | | Contract expenses: | | | | | | | | | | Installation of solar energy systems | | | 11,177 | | | | 13,135 | | | Service | | | 1,589 | | | | 1,623 | | | Customer acquisition | | | 3,616 | | | | 5,918 | | | Contract loss | | | (3,653 | ) | | | (5,084 | ) | | Operating expense | | | 9,793 | | | | 10,789 | | | Proxy contest expense | | | - | | | | 1,186 | | | Goodwill impairment | | | 1,338 | | | | - | | | Litigation | | | 187 | | | | 327 | | | Operating loss | | | (14,971 | ) | | | (17,386 | ) | | Change in fair value of derivative liabilities and loss on debt extinguishment | | | (27,134 | ) | | | (379 | ) | | Amortization of debt discount and deferred loan costs | | | (1,042 | ) | | | (3 | ) | | Other income | | | 1,063 | | | | 68 | | | Net loss | | $ | (42,084 | ) | | $ | (17,700 | ) | | Net loss per share: | | | | | | | | | | Basic and Diluted | | $ | (1.18 | ) | | $ | (2.55 | ) | | Weighted-average shares outstanding: | | | | | | | | | | Basic and Diluted | | | 35,618 | | | | 6,950 | |
See accompanying notes to consolidated financial statements.
REAL GOODS SOLAR, INC. Consolidated Statement of Changes in Shareholders’ Equity | | | | | | | | | | | | | | | Total | | | | | Class A Common Stock | | | Additional | | | Accumulated | | | 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 | | | Equity changes related to compensation | | | | | | | - | | | | 249 | | | | - | | | | 249 | | | Proceeds from common stock offering and warrant exercises, net of costs | | | 6,780,939 | | | | - | | | | 17,095 | | | | - | | | | 17,095 | | | Fair value of shares issued for convertible note and interest and preferred stock liability converted to common stock | | | 177,018 | | | | - | | | | 734 | | | | - | | | | 734 | | | Fractional shares issued in connection with reverse split | | | 10,737 | | | | - | | | | - | | | | - | | | | - | | | Proxy contest consideration | | | - | | | | - | | | | 810 | | | | - | | | | 810 | | | Net Loss | | | - | | | | - | | | | - | | | | (17,700 | ) | | | (17,700 | ) | | Balances, December 31, 2017 | | | 8,151,845 | | | $ | 8 | | | $ | 206,640 | | | $ | (200,482 | ) | | $ | 6,166 | | | Proceeds from January 2018 Offering of common stock issuance and warrant exercises, net of costs | | | 1,600,000 | | | | - | | | | 1,524 | | | | - | | | | 1,524 | | | Issuance and conversion of 2018 Notes, net of costs | | | 72,826,126 | | | | 8 | | | | 31,816 | | | | - | | | | 31,824 | | | Proceeds from warrant exercises related to 2018 Note Offering | | | 8,681,667 | | | | 1 | | | | 13,088 | | | | - | | | | 13,089 | | | Share-based compensation | | | - | | | | - | | | | 263 | | | | - | | | | 263 | | | Common stock issued to settle proxy contest | | | 600,000 | | | | - | | | | - | | | | - | | | | - | | | Net Loss | | | - | | | | - | | | | - | | | | (42,084 | ) | | | (42,084 | ) | | Balances, December 31, 2018 | | | 91,859,638 | | | $ | 17 | | | $ | 253,331 | | | $ | (242,566 | ) | | $ | 10,782 | |
See accompanying notes to consolidated financial statements.
REAL GOODS SOLAR, INC. Consolidated Statements of Cash Flows | | | For the years ended December 31, | | | (in thousands) | | 2018 | | | 2017 | | | Operating activities: | | | | | | | | Net loss | | $(42,084) | | | $(17,700) | | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | Depreciation | | | 401 | | | | 415 | | | Amortization of POWERHOUSE™ License | | | 33 | | | | - | | | Share-based compensation expense | | | 263 | | | | 249 | | | Goodwill impairment | | | 1,338 | | | | - | | | Change in fair value of derivative liabilities and loss on debt extinguishment | | | 27,134 | | | | 379 | | | Amortization of debt discount and issuance costs | | | 1,042 | | | | - | | | Bad debt expense | | | 37 | | | | 353 | | | Inventory obsolescence | | | 32 | | | | 398 | | | Gain on settlement of liability | | | (942 | ) | | | - | | | (Gain) loss on sale of assets | | | - | | | | (3 | ) | | Loss on settlement of proxy contest | | | - | | | | 810 | | | Changes in operating assets and liabilities: | | | | | | | | | | Accounts receivable | | | 1,410 | | | | 397 | | | Costs in excess of billings on uncompleted contracts | | | 51 | | | | 164 | | | Inventory | | | 386 | | | | (872 | ) | | Deferred costs on uncompleted contracts | | | 379 | | | | (217 | ) | | Net investment in sales-type leases and other current assets | | | 277 | | | | (945 | ) | | Other non-current assets | | | 364 | | | | 542 | | | Accounts payable | | | (834 | ) | | | (804 | ) | | Accrued liabilities | | | 97 | | | | (844 | ) | | Billings in excess of costs on uncompleted contracts | | | - | | | | (107 | ) | | Deferred revenue and other current liabilities | | | (854 | ) | | | 664 | | | Other liabilities | | | (897 | ) | | | 1,086 | | | Net cash used in operating activities | | | (12,367 | ) | | | (16,035 | ) | | Investing activities: | | | | | | | | | | Payments related to POWERHOUSE™ license | | | (2,121 | ) | | | (1,114 | ) | | Purchases of property and equipment | | | (25 | ) | | | (432 | ) | | Payments related to RGS 365™ portal | | | - | | | | (413 | ) | | Net cash used in investing activities | | | (2,146 | ) | | | (1,959 | ) | | Financing activities: | | | | | | | | | | Proceeds from warrants | | | 9,614 | | | | 1,064 | | | Proceeds from issuance of 2018 Notes | | | 5,000 | | | | - | | | Proceeds from collection of Investor Notes | | | 4,891 | | | | - | | | Proceeds from the issuance of common stock | | | 920 | | | | 16,187 | | | Payments for transaction costs | | | (1,251 | ) | | | (158 | ) | | Restricted cash released upon conversion of debt | | | - | | | | 173 | | | Principal borrowings on revolving line of credit | | | - | | | | 1,498 | | | Principal payments on revolving line of credit | | | - | | | | (2,540 | ) | | Net cash provided by financing activities | | | 19,174 | | | | 16,224 | | | Net increase (decrease) in cash | | | 4,661 | | | | (1,770 | ) | | Cash at beginning of year | | | 1,170 | | | | 2,940 | | | Cash at end of year | | $ | 5,831 | | | $ | 1,170 | | | Supplemental cash flow information: | | | | | | | | | | Income taxes paid | | | - | | | | - | | | Interest paid | | | - | | | | 8 | | | Non-cash items | | | | | | | | | | Proxy contest settlement payment in shares of common stock | | | - | | | | 810 | | | Debt discount arising from 2018 Note Offering | | | 10,088 | | | | - | | | Embedded derivative liability with 2018 Note Offering | | | 12,987 | | | | - | | | Common stock warrant liability with 2018 Note Offering | | | 6,818 | | | | - | | | Issuance of Class A common stock for conversion of 2018 Notes, net of costs | | | 31,824 | | | | - | | | Issuance of Class A common stock for exercise of common stock warrants | | | 13,089 | | | | - | | | Interest paid with common stock | | | - | | | | 125 | |
See accompanying notes to consolidated financial statements.
REAL GOODS SOLAR, INC.
Consolidated statements of operations
| | | | | | | | | | | | | Years ended December 31, | | (in thousands, except per share data) | | 2005 | | 2006 | | 2007 | Net revenue | | $ | 12,114 | | $ | 16,812 | | $ | 18,922 | Cost of goods sold | | | 7,763 | | | 10,862 | | | 12,426 | | | | | | | | | | | Gross profit | | | 4,351 | | | 5,950 | | | 6,496 | | | | | | | | | | | Expenses: | | | | | | | | | | Selling and operating | | | 3,464 | | | 4,964 | | | 5,728 | General and administrative | | | 492 | | | 567 | | | 582 | | | | | | | | | | | Total expenses | | | 3,956 | | | 5,531 | | | 6,310 | | | | | | | | | | | Income before income taxes | | | 395 | | | 419 | | | 186 | Income tax expense | | | 159 | | | 169 | | | 84 | | | | | | | | | | | Net income | | $ | 236 | | $ | 250 | | $ | 102 | | | | | | | | | | | Net income per share: | | | | | | | | | | Basic and diluted | | $ | 0.02 | | $ | 0.03 | | $ | 0.01 | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | Basic and diluted | | | 10,000 | | | 10,000 | | | 10,000 | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
REAL GOODS SOLAR, INC.
Consolidated statement of changes in shareholders’ equity
| | | | | | | | | | | | | | | | | | | | | | | | Class A
Common Stock | | Class B
Common Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | | Total | | (in thousands, except share data) | | Shares | | Amount | | Shares | | Amount | | | | Balance at December 31, 2004 | | — | | $ | — | | — | | $ | — | | $ | 2,150 | | $ | (1,088 | ) | | $ | 1,062 | Net income | | — | | | — | | — | | | — | | | — | | | 236 | | | | 236 | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2005 | | — | | | — | | — | | | — | | | 2,150 | | | (852 | ) | | | 1,298 | Net income | | — | | | — | | — | | | — | | | — | | | 250 | | | | 250 | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2006 | | — | | | — | | — | | | — | | | 2,150 | | | (602 | ) | | | 1,548 | Net income | | — | | | — | | — | | | — | | | — | | | 102 | | | | 102 | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2007 | | — | | $ | — | | — | | $ | — | | $ | 2,150 | | $ | (500 | ) | | $ | 1,650 | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
REAL GOODS SOLAR, INC.
Consolidated statements of cash flows
| | | | | | | | | | | | | | | | Years ended December 31, | | | (in thousands) | | 2005 | | | 2006 | | | 2007 | | Operating activities: | | | | | | | | | | | | | Net income | | $ | 236 | | | $ | 250 | | | $ | 102 | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | Depreciation | | | 83 | | | | 81 | | | | 94 | | Amortization | | | — | | | | — | | | | 7 | | Deferred income tax expense | | | 159 | | | | 436 | | | | 218 | | Changes in operating assets and liabilities, net of effects from acquisitions: | | | | | | | | | | | | | Accounts receivable, net | | | (997 | ) | | | (1,000 | ) | | | (35 | ) | Inventory | | | (341 | ) | | | (1,558 | ) | | | 243 | | Deferred costs on uncompleted contracts | | | — | | | | (226 | ) | | | (481 | ) | Deferred advertising costs | | | (71 | ) | | | (17 | ) | | | (19 | ) | Other current assets | | | — | | | | (46 | ) | | | (38 | ) | Accounts payable | | | 300 | | | | (354 | ) | | | 690 | | Accrued liabilities | | | 11 | | | | 9 | | | | (96 | ) | Deferred revenue on uncompleted contracts | | | — | | | | 376 | | | | 621 | | | | | | | | | | | | | | | Net cash provided by (used in) operating activities | | | (620 | ) | | | (2,049 | ) | | | 1,306 | | | | | | | | | | | | | | | | | | | Investing activities: | | | | | | | | | | | | | Purchase of property and equipment | | | — | | | | (42 | ) | | | (7 | ) | Proceeds from sale of property and equipment | | | — | | | | — | | | | 6 | | Purchase of business, net of cash acquired | | | — | | | | — | | | | (3,377 | ) | | | | | | | | | | | | | | Net cash used in investing activities | | | — | | | | (42 | ) | | | (3,378 | ) | | | | | | | | | | | | | | | | | | Financing activities: | | | | | | | | | | | | | Proceeds from borrowings from Gaiam | | | 719 | | | | 2,125 | | | | 2,366 | | | | | | | | | | | | | | | Net cash provided by financing activities | | | 719 | | | | 2,125 | | | | 2,366 | | | | | | | | | | | | | | | | | | | Net increase in cash and cash equivalents | | | 99 | | | | 34 | | | | 294 | | Cash and cash equivalents at beginning of year | | | 115 | | | | 214 | | | | 248 | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | $ | 214 | | | $ | 248 | | | $ | 542 | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
Notes to consolidated financial statements 1. Principles of Consolidation, Organization and Nature of Operations The accompanying financial statements represent the solar energy business (“we”, “us”, or “our”) of Gaiam, Inc. and its subsidiaries (“Gaiam” or the “Parent”) as though the transfer of such business and the related net assets had been transferred to us on January 1, 2003. We are a leading residential solar energy integrator. We were incorporated in Colorado on January 29, 2008 under the name
Real Goods Solar, Inc. (“Real Goods”RGS” or the “Company”) is in the solar energy systems business as (i) the manufacturer of POWERHOUSE™ 3.0 in-roof solar shingles under a license agreement with Dow Global Technologies LLC (“Dow”) and are currently(ii) a wholly owned subsidiary of Gaiam.residential and commercial solar energy engineering, procurement, and construction firm (“EPC”). We were not operating as a separate business within Gaiam. Accordingly, the historical financial statements have been prepared on a “carve-out” basis. The historical statements have been prepared in accordance with Regulation S-X, Article 3,General instructions to financial statements, and Staff Accounting Bulletin Topic 1-B1,Costs reflected in historical financial statements (“SAB 1-B1”). The accompanying historical statements include allocations of certain Gaiam expenses, including costs of fulfillment, customer service, financial, and other administrative services. The expense allocations have been determined on bases that Gaiam and we consider to be reasonable reflections of the utilization of services provided or the benefits received by us. The allocations and related estimates and assumptions are described more fully in Note 2, Significant Accounting Policies.
The consolidated financial statements areinclude the accounts of RGS and its wholly-owned subsidiaries. RGS has prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP, andwhich include ourthe Company’s accounts and those of ourits subsidiaries. Intercompany transactions and balances have been eliminated. The Company has included the results of operations of acquired companies from the effective date of acquisition. POWERHOUSE™ License Agreement A material significant event occurred on September 29, 2017 (the “Effective Date”), when the Company executed an exclusive domestic and international world-wide Technology License Agreement (the “License”) with Dow for its POWERHOUSE™ in-roof solar shingle. The License allows RGS to market the POWERHOUSE™ 3.0 product using the Dow name, and under the terms of the License agreed to a license fee of $3 million. The license fee was comprised of two payments; the first $1 million was paid in connection with the Effective Date of the License in 2017 and the remaining $2 million was paid in 2018 in connection with receiving UL certification. The License requires the Company to commercialize and sell a minimum of 50 megawatts of solar within 5-years of the Effective Date to retain exclusive world-wide rights. The Company obtained UL certification for POWERHOUSE™ 3.0 during November 2018, immediately after which the Company commenced commercialization of POWERHOUSE™ 3.0 entailing the manufacturing, marketing and sale of POWERHOUSE™ 3.0 to roofing companies and homebuilders. The first purchase order for POWERHOUSE™ 3.0 was received from a customer on December 27, 2018 and shipped to the customer in January 2019.
Liquidity and Financial Resources Update The Company’s historical operating results indicate substantial doubt exists related to its ability to continue as a going concern. Management’s plans and actions, which are intended to mitigate the substantial doubt raised by the Company’s historical operating results in order to satisfy its estimated liquidity needs for a period of 12 months from the issuance of the consolidated financial statements, are discussed below. As the Company cannot predict, with certainty, the outcome of its actions to generate liquidity, or whether such actions would generate the expected liquidity as currently planned, management’s plans to mitigate the risk and extend cash resources through the evaluation period, are not considered probable under current accounting standards for assessing an entity’s ability to continue as a going concern. As of December 31, 2018, the Company has cash of $5.8 million, working capital of $6.9 million, debt of $0.5 million and shareholders’ equity of $10.8 million. The Company has experienced recurring operating losses and negative cash flow from operations which have necessitated: | · | Exiting the mainland residential division and execution of a reduction in workforce, see Note 16. Subsequent Events; |
| · | Focusing on growing POWERHOUSE™ revenue through a re-allocation of personnel to POWERHOUSE™ sales and initiating sales to other solar installers and distribution companies; and |
| · | Raising additional capital. See Note 8. Shareholders Equity and Note 16. Subsequent Events for transactions to raise capital during the second quarter of 2019. |
No assurances can be given that the Company will be successful with its plans to grow revenue for profitable operations. The Company has historically incurred a cash outflow from its operations as its revenue has not been at a level for profitable operations. As discussed above, a key component of the Company’s revenue growth strategy is the sale of the POWERHOUSE™ 3.0 in-roof solar shingle. The Company obtained UL certification for POWERHOUSE™ at the close of 2018 and therefore only recently begun to market POWERHOUSE™ at the start of 2019. The Company believes that it will require several quarters to generate sales to meet its goals for profitable operations.
The first quarter of the year has always been one of the Company’s slowest sales periods and as such, this is a period of higher cash outflow. POWERHOUSE™ 3.0 sales during the first quarter of 2019 have been materially less than the Company’s expectations and, accordingly, the Company raised additional capital during the second quarter of 2019. As discussed above, (i) the Company expects that future sales of POWERHOUSE™ 3.0 in-roof solar shingles will be its primary source of revenue and (ii) the Company only recently began marketing POWERHOUSE™ 3.0, and accordingly, expects to incur a quarterly cash outflow for a portion of 2019. Errors Identified in Previously Issued Consolidated Financial Statements During the preparation of the 2018 consolidated financial statements, the Company identified an error in the accounting for the 2018 Note Offering (Note 9. Convertible Debt). The Company incorrectly included debt issue costs of $0.6 million in the calculation of the debt discount and loss upon issuance, which resulted in amortization of debt discount being overstated and the loss on debt extinguishment to be understated. As a result, “change in fair value of derivative liabilities and loss on debt extinguishment” was understated by $0.5 million and $0.7 million and “amortization of debt discount and deferred loan costs” was overstated by $0.8 million and $0.7 million for the quarters ended June 30, 2018, and September 30, 2018, respectively. The Company evaluated the impact of the error on its previously issued financial statements and concluded that the impact was not material. The error was corrected in the fourth quarter of 2018 and resulted in a net impact of $0.09 million.
2. Significant Accounting Policies
Use of Estimates The preparation of the consolidated financial statements in accordance with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Significant estimates are used to value warranty liabilities, the fair value of derivative liabilities embedded in complex financial instruments, common stock warrants, and allowance for doubtful accounts. Actual results could differ materially from those estimates.
Discontinued Operations During 2014, the Company committed to a plan to sell certain contracts and rights comprised of the Company’s large commercial installations business, otherwise known as the Company’s former Commercial segment. The Company had previously reported this business as a discontinued operation, separate from the Company’s continuing operations. As of December 31, 2018, this business no longer met the criteria to be presented as discontinued operations. The remaining assets and liabilities were reclassified out of discontinued operations to continuing operations on the consolidated balance sheet as of December 31, 2017. Income from discontinued operations on the consolidated statements of operations was reclassified into the loss related to current continuing operations for the years ended December 31, 2018 and 2017 and had no impact on net loss. References to any gains or losses from discontinued operations as well as net cash used or provided by discontinued operations were removed, with these amounts reclassified into the continuing operations figures for the years ending December 31, 2018 and 2017. The 2017 financial statements have been reclassified to eliminate the presentation of the business as a discontinued operation and did not result in a material change.
Cash and The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Cash Equivalents Cash and cash equivalents includeconsist primarily of demand deposit accounts with financial institutions and highly liquid investments, which mature within three months of date of purchase. The fair value of the cash and cash equivalents approximates their carrying value because of their short maturities.that are denominated in U.S. dollars
Concentration of Risk and Allowance for Doubtful Accounts
We have a potential concentration of credit risk in our accounts receivable in that 2 customers accounted for 48.3% of accounts receivable as of December 31, 2007. These accounts receivable represent rebates receivable from a state governmental agency and a public utility company. We maintain
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of ourits customers to make required payments. We makeThe Company estimates anticipated losses based on the expected collectability of the collectibility of ourall accounts receivable, by analyzing historical bad debts,taking into account collection history, number of days past due, identification of specific customer creditworthinessexposure and current economic trends. When the Company determines a balance is uncollectible and no longer actively pursues collection of the account, it is written off. The allowance for doubtful accounts was $183,000$0.5 million and $151,000 as of$0.8 million December 31, 20062018 and 2007,2017, respectively. If the financial condition of our customers were to deteriorate such that their ability to make payments to us was impaired, additional allowances could be required. Inventory Inventory for our Solar Division consists primarily of solar energy system components (such as solar panels and inverters) and finished goods held for sale at our Solar Living Center located in Hopland, California. We state ourits cost is determined by the first-in, first-out ("FIFO") method. The inventory is stated at the lower of cost (first-in, first-out method) or market. We identify thenet realizable value with an allowance for slow moving and obsolete inventory items to be written down for obsolescence based on the item’s current sales status and condition. We write down discontinued or slow moving inventories based on an estimate of the markdown to the retail price neededrequired to sell through our current stock levelor dispose of the inventories. As of December 31, 2006 and 2007, we estimatedsuch items. The Company has an allowance for obsolete or slow-moving inventory to be immaterial. Gaiam owns inventory to fulfill catalogof $0.7 and ecommerce sales until a customer sales order is fulfilled. Notes to consolidated financial statements$0.6 million at December 31, 2018 and 2017, respectively.
Deferred Advertising Costs
Deferred advertising costs relate toPOWERHOUSE™ inventories are recorded at lower of cost (incurred from third party supply channel manufacturers) or net realizable value. Cost is determined using the preparation, printing, advertisingFIFO method. Management will establish an estimated excess and distribution of catalogs. We defer such costs for financial reporting purposes until the catalogs are distributed, then amortize such costs over succeeding periodsobsolete inventory reserve based on the basis of estimated direct relationship sales. We amortize seasonal catalogs within seven monthsslow-moving and our annual catalogs within one year. Forecasted sales statistics are the principal factor used in estimating the amortization rate. We expense other advertising and promotional costs as incurred. Amounts recorded as advertising expense were $0.7 million, $1.2 million and $1.1 million for the years endedobsolete inventory. At December 31, 2005, 2006,2018, there was no excess and 2007, respectively, and are included in selling and operating expense in the consolidated statements of operations.obsolete inventory reserve.
Property and Equipment We state property
Property and equipment is stated at cost less accumulated depreciation and amortization. We compute depreciationDepreciation of property and equipment is computed on the straight-line method over estimated useful lives, generally three to seventwenty years. We amortizeRGS amortizes leasehold and building improvements over the shorter of the estimated useful lives of the assets or the remaining term of the lease or remaining life of the building, respectively.
Goodwill and OtherPurchased Intangibles Intangible assets arising from business combinations, such as acquired customer contracts and relationships (collectively, “customer relationships”), licenses, trademarks, non-compete agreements are initially recorded at fair value. Goodwill represents the excess of the purchase considerationprice over the estimated fair value of the net identifiable assets acquired less liabilities assumed in a business acquisition. Goodwillcombination. The Company early adopted ASU 2017-04 during the second quarter of 2018 while performing its annual impairment test. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is no longer amortized, but is reviewed for impairment annually or more frequently if impairment indicators arise. We comparelikely than not that the estimated fair value of a reporting unit withis less than its carrying amount, including goodwill.value. The qualitative assessment includes comparing the overall financial performance of the reporting units against the planned results used in the last quantitative goodwill impairment test. If it is determined under the estimatedqualitative assessment that it is more likely than not that the fair value of a reporting unit exceedsis less than its carrying amount, goodwillvalue, then a quantitative impairment test is performed. The estimated fair value of the reporting unit is considered not impaired. Ifcompared with its carrying value (including goodwill) and if the carrying amount of a reporting unitvalue exceeds its estimated fair value, an impairment charge is recorded. As a result of the goodwillannual impairment test, the Company fully impaired the Goodwill balance charging an impairment loss to the Consolidated Statement of Operations. Fair value of the reporting unit is performeddetermined using a discounted cash flow analysis. The use of present value techniques requires us to measuremake estimates and judgments about the amount of impairment loss. Since we operate in only one business segment, we assess impairment atCompany’s future cash flows. These cash flow forecasts will be based on assumptions that are consistent with the enterprise levelplans and use a market value method forestimates the purposes of testing for potential impairment.Company uses to manage its business. The annual process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. Application of alternative assumptions and definitions could yield significantly different results. We do not believe that an impairment existed as The Company capitalized the up-front POWERHOUSE™ 3.0 license payment, costs to obtain UL certification and legal costs to acquire the License. The intangible asset is amortized to operations, commencing November 2018 after UL certification, on a straight-line basis over the expected life of the License through 2034. As of December 31, 2007. Purchase Accounting
We account for2018, the acquisitionintangible asset had a carrying cost of a controlling interest$3.2 million, with $0.03 million in a business using the purchase method. In determining the estimated fair value of certain acquired assets and liabilities, we make assumptions based upon historical and other relevant information and, in some cases, reports of independent experts. Assumptions may be incomplete, and unanticipated events and circumstances may occur that could affect the validity of such assumptions, estimates, or actual results.related amortization. The estimated fair value of assets and liabilities acquired in recent business combinations are preliminary as of December 31, 2007. We expect to obtain information necessary to finalize the estimated values during 2008.
Revenue Recognition
Revenue consists of solar energy system installation contract fees and sales of renewable and sustainable energy products. We recognize revenue from fixed price contracts using either the completed or percentage-of-completion method, based on the energy sizeamortization expense for each of the solar energy system installation project. We recognize revenue from solar energy system installations of less than 250 kilowatts when the installationfive succeeding fiscal years is substantially complete, determined based on departure from the job site or passing of building inspection, while we recognize revenue from solar energy system installations equalexpected to or greater than 250 kilowatts on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to total estimated costs for each contract. We recognize revenue from the sale of renewable and sustainable energy products when
Notes to consolidated financial statementsbe $0.2 million per annum.
the following four basic criteriaIntangible assets with finite useful lives are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurredamortized over their respective estimated useful lives and reviewed for impairment whenever events or services rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. We recognize amounts billed to customers for postage and handling as revenue at the same timechanges in circumstances indicate that the revenues arising from the product sale are recognized. We include postage and handling costs, which were approximately $0.6 million for 2005 and $0.7 million each year for 2006 and 2007, in selling and operating expense along with other fulfillment costs.
The current asset “Deferred costs on uncompleted contracts” represents contract costs incurred but not recognizable until recognitioncarrying amount of the related contract revenue and revenues in excess of amounts billed. The current liability “Deferred revenue on uncompleted contracts” represents billings in excess of revenue recognized. We had no contracts accounted for under the percentage-of-completion method for 2006 and 2007.
Allocation of Costs
Gaiam provides for us executive, management, financial, audit, accounting, tax, treasury, human resources, payroll, technical, fulfillment, inventory management, customer service and certain occupancy and related office services under an Intercorporate Services Agreement. Our accompanying financial statements include an allocation of these expenses. The allocation is based on a combination of factors, including revenue, order counts, and operating expenses. We believe the allocation methodologies used are reasonable and result in an appropriate allocation of costs incurred by Gaiam and its subsidiaries on our behalf. However, these allocationsasset may not be indicative ofrecoverable.
Revenue Recognition For the cost of future services.Company’s significant accounting policy related to revenue please see Note 3. Revenue. Share-Based Compensation As of January 1, 2006, we adopted the provisions of SFAS No. 123(R),Accounting
The Company recognizes compensation expense for Stock-Based Compensation (“SFAS 123(R)”), which requires companies to recognize compensation cost for stock-basedshare-based awards based on the estimated fair value of the award on the date of grant. We measure compensation cost at the grant date based on the fair value of the award and recognize compensation cost upon the probable attainment of a specified performance condition or over a service period. We useThe Company uses the Black-Scholes option valuation model to calculateestimate the fair value disclosures under SFAS 123(R).for purposes of accounting and disclosures. In calculatingestimating this fair value, there are certain assumptions that we use, as disclosed inare used (see Note 6,11. Share-Based Compensation, consisting ofCompensation), including the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of a different estimateestimates for any one of these componentsassumptions could have a material impact on the amount of calculatedreported compensation expense. We did not grant any stock-based awards until 2007. In determining the fair value of our common stock at the date of grant of stock options, we set the market value at the higher of an independent offer to purchase a portion of our company in exchange for preferred stock, the value of recent acquisitions, and an evaluation performed by an independent firm retained for that purpose. See Note 6, Share-Based Compensation. Income Taxes For financial reporting purposes, we calculated income tax expense and deferred income tax balances as if we were a separate entity and had prepared our own separate tax return. We provide for
The Company recognizes income taxes pursuant tounder the asset and liability method as prescribed in SFAS No. 109,Accounting for Income Taxes. The liability method requires recognition of deferredmethod. Deferred income taxes are recognized based on temporary differences between financial reporting and income tax basesbasis of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset is more likely than not. Our effective tax rate remains fairly consistent. We haveRGS has significant NOL carry forwardsnet operating loss carry-forwards and expect ourevaluates at the end of each reporting period whether it expects it is more likely than not that the deferred tax assets towill be fully recoverable through the reversal of taxable temporary differences in future years as a result of normal business activities. We entered intoand provides a tax sharing agreement with Gaiam providing payments to Gaiamvaluation allowance as we utilize our NOL in the future. See Note 10, Transactions With Gaiam. Notes to consolidated financial statements
Effective January 1, 2007, we adopted the provisions of SFAS Interpretation No. 48,Accounting of Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN 48”). Under FIN 48, we must recognize the tax benefit from an uncertain tax position onlynecessary. A valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the appropriate valuation allowance, the Company considered projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies, and its overall deferred tax position. To identify any uncertain tax positions, the Company reviews (1) the decision to exclude from the tax return certain income or transactions; (2) the assertion that a particular equity restructuring (e.g., a spin-off transaction) is tax-free when that position willmight actually be sustained on examination byuncertain, and; (3) the taxing authorities, based on the technical merits of the position. We measure thedecision not to file a tax benefits recognizedreturn in the consolidated financial statements froma particular jurisdiction for which such a position based onreturn might be required in tax years that are still subject to assessment or challenge under relevant tax statutes. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest benefitamount that has ais greater than 50% likelihoodlikely of being realized upon ultimate resolution.realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The applicationCompany records interest related to unrecognized tax benefits in interest expense and penalties in selling, general, and administrative expenses when applicable.
Warranties
The Company warrants its EPC solar energy systems sold to customers for up to 10 years against defects in installation workmanship. The manufacturers’ warranties on the solar energy system components, which are typically passed through to the customers, typically have product warranty periods of income tax law10 years and a limited performance warranty period of 25 years. The Company generally provides for the estimated cost of warranties at the time the related revenue is inherently complex. Lawsrecognized. The Company also maintains specific warranty liabilities for large commercial customers. The Company assesses the accrued warranty reserve quarterly and regulationsadjusts the amounts as necessary based on actual experience and changes in this areafuture estimates. The Company’s manufacturing warranties for its POWERHOUSE™ solar shingle, are voluminousan 11-year product warranty, which is the standard product warranty of most traditional solar panels today, and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to our subjective assumptions and judgments which can materially affect amounts recognized in our Consolidated Balance Sheets and Statements of Operations.a 24-year power production warranty. The resultCompany receives warranties from its supply chain matching the terms of the reassessmentPOWERHOUSE™ solar shingle warranty. As of our tax positions in accordance with FIN 48 did not have a material impact on our consolidated financial statements.December 31, 2018, there were no POWERHOUSE™ sales which required an estimate of warranty liability.
Net Income PerLoss per Share In accordance with SFAS No. 128,Earnings Per Share, we compute Basic Earnings Per Share (“EPS”)
RGS computes net loss per share by dividing the net income or loss available to common shareholders(loss) by the weighted average number of shares of common sharesstock outstanding for the period. Diluted EPSnet loss per share reflects the potential dilution that could occur if options or warrants to issue shares of ourthe Company’s Class A common stock were exercised. Common share equivalents of 340,00010,445,294 and 5,857,861 shares have been omitted from net incomeloss per share for 2007,2018 and 2017, respectively, as they are anti-dilutive. Net incomeThe Series O warrants, Series Q warrants, and the 2018 Notes are considered participating securities, and as such, are entitled to participate in any dividends or distribution of assets made by the Company. There was no effect on earnings per share for these participating securities as the Company operated with a net loss for both 2018 and 2017. See Note 8. Shareholders’ Equity for a description of these transactions. The following table sets forth the computation of basic and diluted net income (loss) per share: | | | For the Years Ended December 31, | | | (In thousands, except per share data) | | 2018 | | | 2017 | | | Numerator for basic and diluted net loss per share | | $ | (42,084 | ) | | $ | (17,700 | ) | | Denominator: | | | | | | | | | | Weighted average shares for basic net loss per share | | | 35,618 | | | | 6,950 | | | Effect of dilutive securities: | | | | | | | | | | Weighted average of common stock, stock options and warrants | | | - | | | | - | | | Denominators for diluted net loss per share | | | 35,618 | | | | 6,950 | | | Net loss per share—basic and diluted | | $ | (1.18 | ) | | $ | (2.55 | ) |
Segment Information Operating segments are defined as components of a company about which separate financial information is calculated as ifavailable that is evaluated regularly by the 10,000,000 shareschief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the executive team. Based on the financial information presented to and reviewed by the chief operating decision maker in deciding how to allocate the resources and in assessing the performance of Class Bthe Company, the Company has determined that it has three reporting segments: Solar Division, POWERHOUSE™ and corporate expenses (“other segment”).
Common Stock Warrants The Company accounts for common stock which were issued by uswarrants as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Certain of the Company’s warrants are accounted for as liabilities due to Gaiamredemption provisions that are outside the control of the Company. The Company classifies these warrant liabilities with maturities of five years on January 29, 2008, were issued on January 1, 2003. Use of Estimates
The preparation of financial statements in accordancethe Consolidated Balance Sheet as long-term liabilities. They are revalued at each balance sheet date after their initial issuance with GAAP requires us to make estimates and assumptions that affect the amounts reportedchanges in the accompanying financial statements and disclosures. Althoughvalue recorded in earnings. The Company used a Monte Carlo pricing model to value these estimates are based on our best knowledge of current events and actions that we may undertakewarrant liabilities. The Company also has issued common stock warrants which have been classified in the future, actual results may be different from the estimates.
Recently Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 141 (Revised 2007),Business Combinations (“SFAS 141(R)”). This statement will significantly change the accounting for business combinations. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific items, including the following:
| Ø | | acquisition costs will be generally expensed as incurred;
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| Ø | | noncontrolling interests (formerly known as “minority interests”—see SFAS 160 discussion below) will be valued at fair value at the acquisition date;
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| Ø | | acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;
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| Ø | | in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;
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Notes to consolidated financial statements
| Ø | | restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date and
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| Ø | | changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.
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Also included in the statement are a substantial number of new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginningequity. Upon exercise of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing GAAP until January 1, 2009. Consequently, we will adoptwarrants, the provisions of SFAS 141(R) for our fiscal year beginning January 1, 2009. We believe that SFAS 141(R) is applicable to us, but cannot yet reasonably estimate the impact of the statement.
In December 2007, FASB issued FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured usingCompany determines the fair value of the noncontrolling equity investmentwarrants exercised using the share price and records the impact to common stock and additional paid-in capital.
Derivatives The Company’sSenior Convertible Notes issued on April 9, 2018 (the "2018 Notes") contained conversion features and various redemption clauses that were required to be bifurcated and were initially measured and recorded at fair value and were revalued at each balance sheet date with changes in the value recorded in earnings. Each of the 2018 Notes gave the holder the right to convert the 2018 Notes into shares of Class A common stock at a set strike price (“conversion feature”). In addition to the conversion feature, redemption of the 2018 Notes could have been triggered by failure to notify the holders timely of a change in control, subsequent placement and failure to timely deliver shares to convert the 2018 Notes. The Company used a Lattice pricing model to value these derivative liabilities. The Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, required the Company to develop its own assumptions. Upon completing our fair value estimate of the derivative liabilities, the Company determined that the fair value exceeded the cash proceeds received and recorded a loss upon issuance. This loss was recorded within the “Change in fair value of derivative liabilities and loss on debt extinguishment” in our Consolidated Statements of Operations and the derivative liabilities are classified as short-term in the Consolidated Balance Sheet as of December 31, 2018, due to their maturity in April 2019. Upon exercise of the conversion option, the derivative liabilities and related debt host were accounted for as an extinguishment whereby a gain or loss was recognized in an amount equal to the difference between the recorded value of the liabilities and the fair value of the consideration issued to extinguish them.
Residential Leases To determine lease classification, the Company evaluates lease terms to determine whether there is a transfer of ownership or bargain purchase option at the end of the lease, whether the lease term is greater than 75% of the useful life, or whether the present value of minimum lease payments exceed 90% of the fair value at lease inception. The Company’s leased systems are treated as sales-type leases under GAAP accounting policies due to the present value of their minimum lease payments exceeding 90% of the fair value at lease inception. Financing receivables are generated by solar energy systems leased to residential customers under sales-type leases. Financing receivables represents gross minimum lease payments to be received from customers over a period commensurate with the remaining lease term of up to 20 years and the systems estimated residual value, net of allowance for estimated losses. Initial direct costs for sales-type leases are recognized as cost of sales when the solar energy systems are placed in service. For systems classified as sales-type leases, the net present value of the minimum lease payments, net of executory costs, is recognized as revenue when the lease is placed in service. This net present value as well as the net present value of the residual value of the lease at termination are recorded as other assets in the Consolidated Balance Sheet. The difference between the initial net amounts and the gross amounts are amortized to revenue over the lease term using the interest method. The residual values of the Company’s solar energy systems are determined at the inception of the lease applying an estimated system fair value at the end of the lease term. RGS considers the credit risk profile for its lease customers to be homogeneous due to the criteria the Company uses to approve customers for its residential leasing program, which among other things, requires a minimum “fair” FICO credit quality. Accordingly, the Company does not regularly categorize its financing receivables by credit risk.
Recently Issued Accounting Standards ASU 2018-20, ASU 2018-11, ASU 2018-01 and ASU 2016-02 In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the deconsolidation date. SFAS 160balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard is effective for the Company on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company has adopted the new standard on January 1, 2019 and used the effective date as its date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company has elected the ‘package of practical expedients’. The Company expects that this standard will have a material effect on our financial statements for contracts in which the Company is the lessee. While the Company continues to assess all of the effects of adoption, the Company currently believe the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate and vehicle operating leases and (2) providing significant new disclosures about our leasing activities. The Company has made an accounting policy election to exclude immaterial leases from lease accounting and will continue to expense them as incurred similar to our capitalization policy. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes expandednot recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company has also elected the practical expedient to not separate lease and non-lease components for all of our leases.
The accounting standards noted above also requires lessors to classify leases as sales-type, direct financing or operating leases. The Company currently holds leases of solar systems where it is the lessor. While the Company continues to evaluate certain aspects of the new standard, it does not expect the new standard to have a material effect on its financial statements for contracts where the Company is the lessor and it does not expect a significant change in our sales-type leasing activities between now and adoption. The Company believes substantially all of its leases will continue to be classified as sales-type leases under the new standard. While the new standard identifies maintenance as a non-lease component of equipment lease contracts, the Company will account for solar system leases and associated maintenance service components as a single, combined lease component. Consequently, the Company does not expect the new standard’s changed guidance on contract components to significantly affect its financial reporting. 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 ASU 2017-11 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 regardingfor equity-classified instruments. The amendments in Part II of ASU 2017-11 recharacterize the interestsindefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the parent and its noncontrolling interest. SFAS 160 isCodification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We will adopt SFAS 160 at the beginning2018. The amendments in Part II of our fiscal year commencing January 1, 2009. We believe SFAS 160 will be applicable to us, but cannot yet reasonably estimate the impact to our consolidated financial statements. In September 2006, FASB issued FASB Statement No. 157,Fair Value Measurements (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 doesASU 2017-11 do not require any newtransition 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.
Recently Adopted Accounting Standards ASU 2017-04 On January 26, 2017, the 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. The guidance 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, measurements. SFAS 157not 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 NovemberDecember 15, 2007,2019. The Company early adopted ASU 2017-04 during the second quarter of 2018 while performing its annual impairment test. As a result, the Company fully impaired the Goodwill balance charging an impairment loss to the consolidated statement of operations. 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 interim periods withinsupersedes 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. The Company adopted 2014-09 as of January 1, 2018 and utilized the modified retrospective method. See Note 3. Revenue below for all required disclosures.
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 fiscal years. Earlier application is encouraged, providedgoods or services using a five-step model to achieve that principle. In addition, the standard requires disclosures to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company has elected to adopt the modified retrospective method for transitioning this accounting standard which requires that the reportingcumulative effect of applying the revenue standard to existing contracts be recorded as an adjustment to retained earnings. Based on the Company’s review of contracts that were not substantially completed on December 31, 2017, there was no impact to the opening retained earnings balance.
Deferred Revenue When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, it records deferred revenue, which represents a contract liability. The Company recognizes deferred revenue as net sales after it has satisfied its performance obligations to the customer and all revenue recognition criteria are met.
Revenue Recognition – Installation of photovoltaic modules (“PV”) solar systems The Company uses standard contract templates to initiate sales with customers and determined that each project started during the year ended December 31, 2018 and each project that was not substantially complete at the adoption date, contains one performance obligation. Although the contract states multiple services which are capable of being distinct, they are considered a single integrated output to the customer which is customized for each customer. As such all the services promised within a contract are considered one performance obligation. The Company generally recognizes revenue for installation of PV solar systems over time following the transfer of control to the customer which typically occurs as the PV solar system is being installed. If control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation. The method utilized by the Company to measure the progress towards completion requires judgment and is based on the products and services provided. The Company utilizes the input method to measure the progress of its contracts because it best depicts the transfer of assets to the customer which incurs as materials are consumed by the project. The input method measures the progress towards completion based on the ratio of costs incurred to date (“actual cost”) to the total estimated costs (“budget”) at completion of performance obligation. Revenue, including estimated fees, are recorded proportionally as costs are incurred. Costs to fulfill include materials, labor and/or subcontractors’ costs, and other direct costs. Indirect costs and costs to procure the panels, inverters, and other system miscellaneous costs needed to satisfy the performance obligation are excluded since the customer does not gain control of those items until delivered to the site. Including the costs of those items would overstate the extent of our performance. Each project’s transaction price is included within the contract and although there is only one performance obligation, changes to the contract price could take place after fulfillment of performance obligation. The Company has considered financing components on projects started during the year ended December 31, 2018 and elected the use of a practical expedient where an entity hasneed not yet issued financial statementsadjust 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 fiscalgood or service will be one year including financial statements foror less. Typically, the payments are received as the performance obligation is being satisfied with a final payment received after the solar system has been installed. All receivables from projects are expected to be received within one year from project completion and there were no adjustments to the contract value. Under ASC 606, the Company is required to recognize as an interimasset the incremental costs of obtaining a contract with a customer if those costs are expected to be recovered. The Company incurs sales commissions that otherwise would not have been incurred if the contract had not been obtained. These costs are recoverable; however, the Company has elected the use of a practical expedient to expense these costs as incurred as the amortization period within that fiscal year. We will adopt the provisions of SFAS 157 in our fiscal year commencing January 1, 2008. We currently believe that adoption of the provisionsasset would be less than one year.
Revenue Recognition – Operations & Maintenance The Company generally recognizes revenue for standard, recurring commercial operations and maintenance services over time as customers receive and consume the benefits of SFAS 157such services, which typically include corrective maintenance, data hosting or energy/deck monitoring services for a period. These services are treated as stand-ready performance obligations and are satisfied evenly over the length of the agreement, so the Company has elected a time-based method to measure progress and recorded revenue using a straight-line method.
Revenue Recognition – Service & Warranty Warranties for workmanship and roof penetration are included within each contract. These warranties cannot be purchased separately from the related services, are intended to safeguard the customer against workmanship defects and does not provide any incremental service to the customer. It is necessary for the Company to perform the specified tasks to provide assurance that the final product complies with agreed-upon specifications and likely do not give rise to a separate performance obligation. The Company will not havecontinue to account for any related warranties in accordance with ASC 460-10 and record an accrual for potential warranty costs at the completion of a materialproject. Any services provided to a customer outside of warranties such as system inspections are recognized upon completion of the service. Adoption of the standard related to revenue recognition had no impact to cash from or used in operating, financing, or investing on our consolidated financialcash flows statements.In the following table, revenue is disaggregated by primary geographical market and includes a reconciliation of the disaggregated revenue with the reportable segments for the years ended December 31, 2018 and 2017. | Reportable Segments | | December 31, 2018 | | (in thousands) | | | | | | | | | | | | | | | | | Primary Geographical Regions | | Solar Division | | | POWERHOUSE™ | | | Total reportable segments | | | All other segments | | | Total | | | East | | $ | 10,022 | | | $ | - | | | $ | 10,022 | | | $ | - | | | $ | 10,022 | | | West | | | 2,681 | | | | - | | | | 2,681 | | | | 25 | | | | 2,706 | | | | | $ | 12,703 | | | $ | - | | | $ | 12,703 | | | $ | 25 | | | $ | 12,728 | |
Notes to consolidated financial statements
| Reportable Segments | | December 31, 2017 | | (in thousands) | | | | | | | | | | | | | | | | | Primary Geographical Regions | | Solar Division | | | POWERHOUSE™ | | | Total reportable segments | | | All other segments | | | Total | | | East | | $ | 12,324 | | | $ | - | | | $ | 12,324 | | | $ | - | | | $ | 12,324 | | | West | | | 3,262 | | | | - | | | | 3,262 | | | | 6 | | | | 3,268 | | | | | $ | 15,586 | | | $ | - | | | $ | 15,586 | | | $ | 6 | | | $ | 15,592 | |
3.
4. Property and Equipment Property and equipment, stated at lower of cost or estimated fair value, consists of the following as of December 31: | (in thousands) | | 2018 | | | 2017 | | | Buildings and leasehold improvements | | $ | 441 | | | $ | 441 | | | Furniture, fixtures and equipment | | | 1,832 | | | | 1,811 | | | Software | | | 2,135 | | | | 2,135 | | | Vehicles and machinery | | | 1,142 | | | | 1,167 | | | Total property and equipment | | | 5,550 | | | | 5,554 | | | Accumulated depreciation and amortization | | | (4,772 | ) | | | (4,400 | ) | | Total property and equipment, net | | $ | 778 | | | $ | 1,154 | |
Depreciation on other property, plant and equipment is calculated using the straight-line method to allocate their depreciable amounts over their estimated useful lives as follows: | | | | | | | | | | (in thousands) | | 2006 | | | 2007 | | Land | | $ | 3,100 | | | $ | 3,100 | | Buildings and leasehold improvements | | | 1,591 | | | | 1,598 | | Furniture, fixtures and equipment | | | 119 | | | | 166 | | Vehicles | | | — | | | | 191 | | | | | | | | | | | | | | 4,810 | | | | 5,055 | | | | | Accumulated depreciation and amortization | | | (579 | ) | | | (673 | ) | | | | | | | | | | | | $ | 4,231 | | | $ | 4,382 | | | | | | | | | | |
| | Useful lives | | Buildings | | 40 years | | Leasehold improvements | | 3-5 years | | Furniture, fixtures and equipment | | 3-5 years | | Software | | 3-15 years | | Vehicles and machinery | | 2-7 years |
For the years ended December 31, 2018 and 2017, depreciation expense was $0.4 million per annum.
5. Accrued Liabilities 4. PayableAccrued expenses consist of the following:
| (in thousands) | | 2018 | | | 2017 | | | Accrued Expenses | | $ | 924 | | | $ | 524 | | | Accrued Compensation | | | 476 | | | | 690 | | | Other | | | 69 | | | | 130 | | | Accrued Project Costs | | | 102 | | | | 130 | | | Total | | $ | 1,571 | | | $ | 1,474 | |
6. Related Parties On May 23, 2017, the Company entered into an agreement with Mobomo, LLC (“Mobomo”) pursuant to Gaiamthe design and development of intellectual property at a cost of $0.5 million. The intellectual property consisted of an integrated mobile phone application and the new RGS 365™ customer portal. In 2018, Mobomo continued to provide data hosting services which totaled approximately $20,000. Since 1999, our business has been funded by intercompany borrowings from Gaiam
Mobomo’s Chief Executive Officer Brian Lacey is the son of the Company’s CEO Dennis Lacey. The Company approved the agreement in accordance with its related-party transaction policy. 7. Commitments and through our operating income. As of December 31, 2006 and 2007, we had $13.9 million and $16.3 million, respectively, of intercompany borrowings owed to Gaiam. Contingencies The intercompany borrowings include amounts used to fund business acquisitions, including the recent purchase of Marin Solar, Inc. (“Marin Solar”). We intend to repay the entire intercompany balance with proceeds from the proposed public offering of our Class A common stock. 5. Leases
We leaseCompany leases office and warehouse space through operating leases. Some of the leases have renewal clauses, which range from threeone month to five years.
The Company leases vehicles through operating leases for certain field personnel. Leases range up to five years with varying termination dates through May 2022. The following schedule represents the annual future minimum payments of all leases as of December 31, 2007:2018: | | | Future Minimum | | | (in thousands) | | Lease Payments | | | 2019 | | $ | 848 | | | 2020 | | | 505 | | | 2021 | | | 378 | | | 2022 | | | 112 | | | 2023 and thereafter | | | - | | | Total minimum lease payments | | $ | 1,843 | |
| | | | | (in thousands) | | Operating | 2008 | | $ | 132 | 2009 | | | 108 | | | | | Total minimum lease payments | | $ | 240 | | | | |
WeThe Company incurred office and warehouse rent expense of $73,000, $81,000,$0.6 million and $133,000$0.7 million for the years ended December 31, 2005, 2006,2018 and 2007,2017, respectively. The Company incurred automobile lease expense of $0.3 million and $0.4 million for the years ended December 31, 2018 and 2017, respectively.
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. 8. Shareholders’ Equity 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 thirty shares of Class A common stock were combined into one share of Class A common stock. The reverse split was previously authorized by a vote of the Company’s shareholders on January 23, 2017. The Company did not decrease its authorized 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 a Series K warrant to purchase one share of Class A common stock, and (b) units, “February 6 Alternative Units,” each consisting of a prepaid Series L warrant to purchase one 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, 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 Company received net proceeds of approximately $10.5 million at the closing, after deducting commissions to the placement agents and estimated offering expenses payable by the Company associated with the offering. On February 9, 2017, the Company closed a $6 million offering and sale of (a) units, “February 9 Primary Units,” each consisting of one share of the Company’s Class A common stock, and a Series M warrant to purchase 75% of one share of Class A common stock, and (b) units, “February 9 Alternative Units,” each consisting of a prepaid 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 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 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. January 2018 Offering On January 4, 2018, the Company closed a $1.8 million offering and sale of (a) 800,000 shares of Class A common stock, (b) a prepaid Series P Warrant to purchase 800,000 shares of Class A common stock, and (c) a Series O Warrant to purchase 1,600,000 shares of Class A common stock, pursuant to the Securities Purchase Agreement, dated as of January 2, 2018, by and between the Company and one unaffiliated institutional and accredited investor. The purchase price was $1.15 per share of Class A common. The Company received net proceeds of approximately $1.5 million at the closing, after deducting commissions to the placement agents and estimated offering expenses associated with the offering. 2018 Convertible Note Offering On March 30, 2018, the Company entered into a Securities Purchases Agreement with two unaffiliated institutional and accredited investors for a private placement (the "2018 Notes Offering", see Note 9) of up to $10.75 million in principal amount and $10 million funding amount (reflecting $750,000 of original issue discount) of the 2018 Notes, and Series Q Warrants to purchase 9,270,457 shares of Class A Common Stock. As of December 31, 2018, a total of 73 million shares of Class A common stock had been issued upon conversion of the 2018 Notes, and 8.7 million shares of Class A common stock had been issued upon exercise of the Series Q warrants in exchange for gross proceeds of $8.7 million, before placement agent fees and other expenses. Option Exercises, 2018 Convertible Note Conversions and Warrant Exercises
During the twelve months ended December 31, 2018, the Company issued stock options as discussed in Note 11. Share-Based6. Share-Based CompensationCompensation. During the twelve months ended December 31, 2018, the Company issued 800,000 shares of its Class A common stock upon exercise of Series P warrants and 81,507,793 shares upon conversion of the 2018 Notes and exercise of Series Q warrants. Our share-based compensation program
At December 31, 2018, RGS had the following shares of Class A common stock reserved for future issuance: | Stock options and grants outstanding under incentive plans | | | 1,206,645 | | | Common stock warrants outstanding | | | 8,714,871 | | | 2018 Notes outstanding - derivative liability | | | 1,726,423 | | | Total shares reserved for future issuance | | | 11,647,939 | |
The table below summarizes the Company’s warrant activity: | | Issuances | | | Warrants outstanding at December 31, 2016 | | | 682,693 | | | Issuances | | | 8,178,580 | | | Exercised | | | (3,007,412 | ) | | Warrants outstanding at December 31, 2017 | | | 5,853,861 | | | Issuances | | | 12,385,143 | | | Expired | | | (42,465 | ) | | Exercised | | | (9,481,668 | ) | | Warrants outstanding at December 31, 2018 | | | 8,714,871 | |
9. 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 $750,000 of original issue discount) of Series A Senior Convertible Notes (“Series A Notes”), Series B Senior Secured Convertible Notes (“Series B Notes,” and collectively with the Series A Notes, the “2018 Notes”), and Series Q warrants (the “Series Q Warrants”) to purchase 9,126,984 shares of Class A Common Stock. On April 9, 2018, the Company closed the 2018 Note Offering. At the closing on April 9, 2018, the Company received $5 million of the gross proceeds and two secured promissory notes, one note 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. These Investor Notes are presented net of the convertible debt carrying amount on the Consolidated Balance Sheets due to right of offset. All amounts outstanding under the 2018 Notes matured and were due and payable on or before the one-year anniversary of the issuance of the 2018 Notes (“Maturity Date”). The 2018 Notes did not incur interest other than upon the occurrence of an event of default, in which case the 2018 Notes bore interest at 18% per year (“Interest Rate”). The 2018 Notes were convertible at any time, at the option of the holders, into shares of Common Stock at a conversion price. The initial fixed conversion price (“ICP”) was $1.2405 per share, subject to reduction, as described below, and adjustment for stock splits, stock dividends, and similar events. The ICP of the 2018 Notes were subject to reduction subsequent to shareholder approval. On June 21, 2018 the Company held its 2018 annual shareholder meeting at which time the shareholders approved the 2018 Note Offering and thereby initiating a reset period which enabled the note holders to earn additional amounts (“Additional Amounts”), effectively a make-whole for amounts previously converted. As a result of the shareholder approval, the conversion price of the 2018 Notes and the exercise price of the Series Q Warrants were reset. Subsequent to that date, the Company agreed to permanently reduce the conversion price of the 2018 Notes from $0.3223 to $0.3067 effective on August 27, 2018. The 2018 Notes were convertible at any time, at the option of the holder, into shares of the Company’s Class A common stock at a conversion price equal to $0.3067. The Series Q Warrants were exercisable into shares of the Company’s Class A common stock at an exercise price of $0.3223 per share. If the Company were to have consummated a Subsequent Placement, subject to some exceptions, a Note holder would have had the right to require that the Company redeem, in whole or in part, a portion of the amounts owed by the Company to such holder under a Note in cash. A Note holder could also have required the Company to redeem all or a portion of its 2018 Note in connection with a transaction resulting from a Change of Control and upon the occurrence of an event of default. The 2018 Notes contained customary events of default, including but not limited to: (i) failure to file or have declared effective by the SEC the applicable registration statement required by the Registration Rights Agreement within certain time periods or failure to keep the registration statement effective as required by the Registration Rights Agreement, (ii) failure to maintain the listing of the Common Stock, (iii) failure to make payments when due under the Notes, (iv) breaches of covenants, and (iv) bankruptcy or insolvency. The occurrence of an event of default under the 2018 Notes would have triggered default interest and would have caused an Equity Condition Failure, which may mean that the Company would have been unable to force mandatory conversion of the Notes and that Note Holders may not be required to prepay the Investor Note under a mandatory prepayment event. Following an event of default, Note holders could have required the Company to redeem all or any portion of their Notes in cash at a conversion price equal to the greater of (i) 125% of the amount to be redeemed, and (ii) the product of (A) the amount to be redeemed divided by the conversion price, multiplied by (B) the product of (x) 125% multiplied by (y) the greatest closing sale price of the Common Stock on any trading day during the period commencing on the date immediately preceding such event of default and ending on the date the Company makes the entire redemption payment. The principal amount of the Series B Notes was considered restricted principal until collection of the Investor Notes was received by the Company (“Restricted Principal”). Upon any offset, the restricted principal under a Series B Note would automatically and simultaneously be reduced, on a dollar-for-dollar basis, in an amount equal to the principal amount of an investor’s Investor Note cancelled and offset. Under the terms of the Series B Notes, the Company granted a security interest to each investor in such investor’s Investor Note to secure the Company’s obligations under the applicable Series B Note. Each investor perfected its security interest by taking possession of such investor’s Investor Note at the closing. Each Series Q Warrant is immediately exercisable and will expire five years from the date of issuance. Initially, only 75% of the shares of Common Stock issuable upon exercise of a Series Q Warrant may be exercised, which amount increases upon an investor’s prepayment under such investor’s Investor Note. A holder may not exercise any of the Series Q Warrants, and the Company may not issue shares of Common Stock upon exercise of any of the Series Q Warrants if, after giving effect to the exercise, a holder together with (i) any investment vehicle, including, any funds, feeder funds or managed accounts, currently, or from time to time after the issuance date, directly or indirectly managed or advised by the holder’s investment manager or any of its affiliates or principals, (ii) any direct or indirect affiliates of the holder or any of the foregoing, (iii) any person acting or who could be deemed to be acting as a group together with the holder or any of the foregoing and (iv) any other persons whose beneficial ownership of the Company’s Common Stock would or could be aggregated with the holder’s and certain other “Attribution Parties” would beneficially own in excess of 4.99 or 9.99%, as elected by each investor at closing, of the outstanding shares of Common Stock. At each holder’s option, the cap may be increased or decrease to any other percentage not in excess of 9.99%, except that any increase will not be effective until the 61st day after notice to the Company. As disclosed in Note 2. Significant Accounting Policies, the warrants issued in connection with the 2018 Note Offering as well as the embedded derivatives were accounted for as liabilities that had been initially measured and recorded at fair value and were revalued at each balance sheet date after their initial issuance with the changes in value recorded in earnings. These conversion options accounted for as embedded derivatives were incorporated into the 2018 Notes to incentivize the holders to provide the Company with short term funding for POWERHOUSE™. See Note 10. Fair Value Measurements for information about the techniques the Company uses to measure the fair value of our derivative instruments. The fair value of the embedded derivatives and Series Q warrants exceeded the proceeds received from the 2018 Notes Offering which was recognized as a loss within the line item “Change in fair value of derivative liabilities and loss on debt extinguishment” in the statement of operations. 10. Fair Value Measurements The Company complies with the provisions of FASB ASC No. 820,Fair Value Measurements and Disclosures (“ASC 820”), in measuring fair value and in disclosing fair value measurements at the measurement date. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. FASB ASC No. 820-10-35, Fair Value Measurements and Disclosures- Subsequent Measurement (“ASC 820-10-35”), clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10-35-3 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.
ASC 820-10-35 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: Level 1 Inputs – Level 1 inputs are unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value. An active market is a market in which transactions occur for the item to be fair valued with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 Inputs – Level 2 inputs are inputs other than quoted prices included within Level 1. Level 2 inputs are observable either directly or indirectly. These inputs include: (a) Quoted prices for similar assets or liabilities in active markets; (b) Quoted prices for identical or similar assets or liabilities in markets that are not active, such as when there are few transactions for the asset or liability, the prices are not current, price quotations vary substantially over time or in which little information is released publicly; (c) Inputs other than quoted prices that are observable for the asset or liability; and (d) Inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Inputs – Level 3 inputs are unobservable inputs for an asset or liability. These inputs should be used to determine fair value only when observable inputs are not available. Unobservable inputs should be developed based on the best information available in the circumstances, which might include internally generated data and assumptions being used to price the asset or liability. When determining the fair value measurements for assets or liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets. The following tables present the fair values of derivative instruments included in our consolidated balance sheets as of December 31, 2018 and 2017 (in thousands): | Fair Value of Derivative Instruments | | | | Liability Derivatives | | | | 2018 | | 2017 | | | Balance at December 31, 2018 | | Balance Sheet
Location | | Fair Value | | | Balance Sheet
Location | | | Fair Value | | | Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | Deriviative liability | | Convertible debt, net | | $ | 344 | | | | N/a | | | $ | - | |
The Effect of Derivative Instrument on the Statement of Operations for the Nine Months Ended December 31, 2018 and 2017 | | | | | Amount of Loss Recognized
in Statement of Operations | | Derivatives not designated as
hedging instruments | | Location of Loss Recognized in
Statement of Operations | | 2018 | | | 2017 | | | 2018 Notes Conversion Options | | | | | | | | | | | | | Change in fair value of derivative liabilities and loss on debt extinguishment | | $ | (27,134 | ) | | $ | - | | | | | Amortization of debt discount & deferred loan costs | | | (1,042 | ) | | | - | | | | | | | $ | (28,176 | ) | | $ | - | |
The Company accounts for Series Q warrants in accordance with ASC 480. The Series Q warrants are accounted for as liabilities due to provisions in the warrants allowing the warrant holders to request redemption, upon a change of control, and failure to timely deliver shares of Class A common stock upon exercise or default. The Company classifies these warrant liabilities on the Consolidated Balance Sheet as long-term retention programliabilities, which are revalued at each balance sheet date subsequent to their initial issuance. The Company used a Monte Carlo pricing model to value these warrant liabilities. The Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions.The following tables summarize the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheets: | | | | | | Quoted Prices | | | | | | | | | | | | | | in Active | | | Significant | | | | | | | | | | | Markets for | | | Other | | | Significant | | | | | | | | Identical | | | Observable | | | Unobservable | | | | | | | | Items | | | Inputs | | | Inputs | | | Balance at December 31, 2018 (in thousands) | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Common stock warrant liability | | $ | 511 | | | | - | | | | - | | | $ | 511 | | | Derivative liability | | | 344 | | | | - | | | | - | | | | 344 | | | | | $ | 855 | | | | - | | | | - | | | $ | 855 | |
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 December 31, 2018: | | | | | | Embedded | | | | | | | | Common Stock | | | derivative | | | | | | (in thousands) | | warrant liability | | | liability | | | Total | | | Fair value of financial liabilities at December 31, 2017 | | $ | 76 | | | $ | - | | | $ | 76 | | | Common stock warrant liability | | | 6,818 | | | | - | | | | 6,818 | | | Expiration of common stock warrant liabilities | | | (48 | ) | | | - | | | | (48 | ) | | Change in the fair value of common stock warrant liabilities, net | | | (1,940 | ) | | | - | | | | (1,940 | ) | | Adjustment for exercise of common stock warrant liabilities | | | (4,395 | ) | | | - | | | | (4,395 | ) | | Derivative liability | | | - | | | | 3,195 | | | | 3,195 | | | Investor Notes | | | | | | | (109 | ) | | | (109 | ) | | Change in the fair value of derivative liabilities and additional amounts earned | | | - | | | | 17,910 | | | | 17,910 | | | Conversions of 2018 Notes | | | - | | | | (20,652 | ) | | | (20,652 | ) | | Fair value of financial liabilities at December 31, 2018 | | $ | 511 | | | $ | 344 | | | $ | 855 | |
2018 Notes Derivative Liability The fair value of the 2018 Notes derivative liabilities was derived using a Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 to value the derivative liabilities are as follows: | | | Conversion
Price | | | Closing Market
Price
(average) | | | Risk-free
Rate | | | Dividend
Yield | | | Market
Price
Volatility | | | Remaining
Term
(years) | | | Debt
Yield | | | Soft Call
Threshold | | | First
Redemption
Period | | | Second
Redemption
Period | | | Derivative Liability April 09, 2018 | | $ | 1.26 | | | $ | 0.85 | | | | 2.08 | % | | | 0.00 | % | | | 110 | % | | | 1.00 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability June 30, 2018 | | $ | 0.55 | | | $ | 0.57 | | | | 2.23 | % | | | 0.00 | % | | | 130 | % | | | 0.78 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability September 30, 2018 | | $ | 0.31 | | | $ | 0.39 | | | | 2.36 | % | | | 0.00 | % | | | 125 | % | | | 0.53 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % | | Derivative Liability December 31, 2018 | | $ | 0.31 | | | $ | 0.52 | | | | 2.45 | % | | | 0.00 | % | | | 90 | % | | | 0.28 | | | | 60 | % | | $ | 2.52 | | | | 20 | % | | | 25 | % |
Common Stock Warrants The fair value of Series Q Warrants was derived using a Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 to value the common stock warrant liabilities are as follows: | | | Exercise
Price | | | Strike Floor | | | Closing
Market Price
(average) | | | Risk-free
Rate | | | Dividend
Yield | | | Market
Price
Volatility | | | Remaining
Term
(years) | | | Warrant Liability April 09, 2018 | | $ | 1.12 | | | $ | 0.97 | | | $ | 0.85 | | | | 2.60 | % | | | 0.00 | % | | | 120 | % | | | 5.00 | | | Warrant Liability June 30, 2018 | | $ | 0.55 | | | $ | 0.19 | | | $ | 0.57 | | | | 2.72 | % | | | 0.00 | % | | | 115 | % | | | 4.78 | | | Warrant Liability September 30, 2018 | | $ | 0.32 | | | $ | 0.19 | | | $ | 0.39 | | | | 2.93 | % | | | 0.00 | % | | | 115 | % | | | 4.53 | | | Warrant Liability December 31, 2018 | | $ | 0.32 | | | | N/a | | | $ | 0.52 | | | | 2.49 | % | | | 0.00 | % | | | 120 | % | | | 4.28 | |
2018 Options The determination of the estimated fair value of the 2018 Options (as defined in Note 10) using the Black-Scholes option-pricing model was affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatilities were based on a value calculated using the historical stock price volatility. Expected life was based on the specific vesting terms of the option and anticipated changes to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model was based on U.S. Treasury zero-coupon securities with remaining terms similar to the expected term on the options. RGS does not anticipate paying any cash dividends on its Class A common stock in the foreseeable future and, therefore, an expected dividend yield of zero was used in the option valuation model. The assumptions used to value to 2018 Options as of December 31, 2018 are as follows: | 2018 Non-Qualified Stock Options | | | | | | | | | | | | | Grant Date | | Vesting
Period | | Expected
Life | | Expected
Dividend
Rate | | | Risk-free
Rate | | | Market
Price
Volatility | | | June 21, 2018 | | 2.78 years | | 4.2 years | | | 0 | % | | | 2.70 | % | | | 148.77 | % | | September 4, 2018 | | 2.82 years | | 5.7 years | | | 0 | % | | | 2.78 | % | | | 147.40 | % | | September 10, 2018 | | 2.81 years | | 5.7 years | | | 0 | % | | | 2.83 | % | | | 146.66 | % | | October 15, 2018 | | 2.96 years | | 4.3 years | | | 0 | % | | | 2.96 | % | | | 149.82 | % | | October 29, 2018 | | 2.92 years | | 4.3 years | | | 0 | % | | | 2.87 | % | | | 150.34 | % |
Nonrecurring Fair Value Measurements
The Company tests its long-lived assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the carrying value may exceed its fair value. As described in Note 12. Goodwill Impairment, during the second quarter of 2018, the Company recorded a $1.3 million impairment charge related to goodwill measured at fair value on a nonrecurring basis. When recognizing an impairment charge, the carrying value of the asset is intendedreduced to attract, retainfair value and provide incentives for talented employees, officers,the difference is recorded within operating earnings in our consolidated statements of operations. The fair value measurements included in the indefinite-lived intangible impairments were primarily based on significant unobservable inputs (Level 3) developed using company-specific information. Other Financial Instruments
The Company's financial instruments consist primarily of cash and directorscash equivalents, accounts receivable, accounts payable, deferred revenue and convertible debt. The carrying values of these financial instruments approximate their fair values, due to align shareholder and employee interests. Our predecessor granted options in 2007 that we assumed on Januarytheir short-term nature. 11. Share-Based Compensation At December 31, 2008 as options granted under2017, the Real GoodsCompany’s 2008 Long-Term Incentive Plan (the “Incentive Plan”), which provides for the grantingprovided that an aggregate of options to purchase up to 1,000,00052,536 shares of ourits Class A common stock. Both incentive stock options and nonqualified stock options maycould be issued or subject to awards under the provisions of the Incentive Plan.plan. Employees, members of the boardBoard of directors,Directors, consultants, business partners,service providers and certain key advisors arewere eligible to participate in the 2008 Long-Term Incentive Plan. The 2008 Long-Term Incentive Plan which terminates upon the earlier of a board resolution terminating the Incentive Plan or ten years after the effective date of the Incentive Plan. Optionsexpired under the Incentive Planits terms in 2018. All outstanding options are nonqualified and were generally granted with an exercise price equal to the estimatedclosing market price of ourthe Company’s Class A common stock aton the date of the grant. Options vest based on performance or service conditions, performance (attainment of a certain amount of pre-tax income for a given year), or some combination thereof. Grants typically expire seven years from the date of grant.
NotesOn June 21, 2018, Company shareholders approved the Real Goods Solar 2018 Long-Term Incentive Plan (the “2018 Incentive Plan”) which allows the Company to consolidated financial statementsissue, or grant awards for, up to 1,300,000 shares of Class A common stock. Employees or individuals who perform services for the Company are eligible to participate in the 2018 Incentive Plan, which terminates upon the earlier of a board resolution terminating the 2018 Incentive Plan or ten years after the effective date of June 21, 2018, unless extended by action of the Board of Directors for up to an additional five years. All options are non-qualified and are generally granted with an exercise price equal to the closing market price of the Company’s Class A common stock on the date of the grant. Under the 2018 Incentive Plan, the Company granted multiple non-qualified stock options (“2018 Options”) with various requisite service periods, described in Note 9 Fair Value Measurements, which expire seven years from the grant date. On the last day of each calendar quarter occurring after the grant date, the 2018 Options will vest at 8.3% contingent on continuous employment. The 2018 Options are classified as equity and measured using the “fair-value-based method” with share-based compensation expense recognized in the income statement on a straight-line basis over the requisite service for the entire award.
The determination of the estimated fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. Expected volatilities are based on a value calculated using the combination of historical volatility of comparable public companies in our industry.RGS’ industry and its stock price volatility since the Company’s initial public offering. Expected life is based on the specific vesting terms of the option and anticipated changes to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model is based on U.S. Treasury zero-coupon issuessecurities with remaining terms similar to the expected term on the options. We doRGS does not anticipate paying any cash dividends on ourits Class A common stock in the foreseeable future and, therefore, an expected dividend yield of zero is used in the option valuation model. In accordance with SFAS No. 123(R), we areRGS is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Our predecessor granted stock options at $0.20 per share that we assumed on January 31, 2008 atIn accordance with ASC 718, an exercise price of $3.20 per share. We do not currently have any forfeiture history and presently, dueentity can make an accounting policy to either estimate the limited number of awards that are expected to vest or account for forfeitures as they occur. The Company utilizes the grants, do not expect any of the optionsplan life-to-date forfeiture experience rate to be forfeited. The options assumed are for our Class A common stockestimate option forfeitures and vest only upon an initial public offering of our Class A common stock (50% vest upon an initial public offering and thereafter vest approximately 2.0% per month during the 25-month period subsequent to the completion of the initial public offering). The performance of this condition has not been met; therefore, norecords share-based compensation expense has been recognized. As of December 31, 2007, there was $0.5 million of unrecognized cost related to nonvested shared-based compensation arrangements granted under the Incentive Plan. That cost isonly for those awards that are expected to be recognized over the next 3.5 years. | | | | | | 2007 | | Expected volatility
| | 67 | % | Weighted-average volatility
| | 67 | % | Expected dividends
| | 0 | % | Expected term (in years)
| | 4.0 | | Risk-free rate
| | 4.875 | % |
vest. The following istables below present a summary of the Company’s option activity under the Incentive Plan as of December 31, 2007,2018 and 2017 and changes during the yearyears then ended, giving effectended: | | | | | | | | | Weighted- | | | | | | | | | | | | | | Average | | | | | | | | | | | Weighted- | | | Remaining | | | | | | | | | | | Average | | | Contractual | | | Aggregate | | | | | | | | Exercise | | | Term | | | Intrinsic | | | | | Shares | | | Price | | | (Yrs) | | | Value | | | Outstanding at January 1, 2017 | | | 185 | | | $ | 15,736.67 | | | | 3.30 | | | $ | - | | | Granted | | | - | | | | - | | | | | | | | | | | Exercised | | | - | | | | - | | | | | | | | | | | Forfeited or expired | | | (36 | ) | | | 4,990.00 | | | | | | | | | | | Outstanding at December 31, 2017 | | | 149 | | | $ | 18,452.38 | | | | 2.60 | | | $ | - | | | Exercisable at December 31, 2017 | | | 141 | | | $ | 19,418.30 | | | | 2.80 | | | $ | - | | | Granted | | | 1,331,500 | | | | 0.96 | | | | | | | | | | | Exercised | | | - | | | | - | | | | | | | | | | | Forfeited or expired | | | (125,004 | ) | | | 1.13 | | | | | | | | | | | Outstanding at December 31, 2018 | | | 1,206,645 | | | $ | 3.22 | | | | 6.58 | | | $ | - | | | Exercisable at December 31, 2018 | | | 268,189 | | | $ | 11.26 | | | | 6.53 | | | $ | - | |
The Company granted 1,331,500 stock options and cancelled 125,004 stock options and did not grant any stock options and cancelled 36 stock options during 2018 and 2017, respectively. The Company’s share-based compensation cost charged against income for continuing operations was approximately $0.2 million and $0.2 million during the years 2018 and 2017, respectively. 12. Goodwill Impairment The Company performed its annual test of goodwill as of June 30, 2018, and based on the results of this test, the Company determined that the fair value of the goodwill no longer exceeded the carrying amount. The fair value was determined using a discounted cash flow valuation technique and resulted in the full impairment of goodwill of $1.3 million charging an impairment loss to the options assumed from our predecessor:consolidated statement of operations during the twelve months ended December 31, 2018. | | | | | | | | | | | | | Shares | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value | Outstanding at January 1, 2007 | | — | | $ | — | | | | | Granted | | 300,000 | | | 3.20 | | | | | Exercised | | — | | | — | | | | | Forfeited or expired | | — | | | — | | | | | | | | | | | | | | | Outstanding at December 31, 2007 | | 300,000 | | $ | 3.20 | | 3.5 | | — | | | | | | | | | | | Exercisable at December 31, 2007 | | — | | $ | — | | 3.5 | | — | | | | | | | | | | |
13. Supplier Concentration 7. Shareholders’ EquityThe Company relies on a limited number of third-party suppliers to provide the components used in our POWERHOUSE™ in-roof solar shingles and Warrantsour solar energy systems. The production of POWERHOUSE™ solar laminates, connectors and wire harnesses is concentrated in China so it is reasonably possible that operations could be disrupted in the future.
As part
14. Income Taxes On December 22, 2017, The President of the contingent considerationUnited States signed the TCJA. The enactment of TCJA requires companies, under Accounting Standards Codification (ASC) 740, Income Taxes, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The TCJA would permanently reduce the maximum corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, and the future benefits of existing deferred tax assets would need to be computed at the new tax rate. In addition to the change in the corporate income tax rate, the TCJA further introduced a number of other changes including a one-time transition tax via a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits; the introduction of a tax on global intangible low-taxed income (“GILTI”) for tax years beginning after December 31, 2017; the limitation of deductible net interest to 30% of adjustable taxable income; the further limitation of the deductibility of share-based compensation of certain highly compensated employees; the ability to elect to accelerate bonus depreciation on certain qualified assets; and the Base Erosion and Anti-Abuse Tax ("BEAT"), amongst other changes. The Company recognized the income tax effects of the 2017 Tax Act in its financial statements in accordance with Staff Accounting Bulletin (SAB) No. 118, which provides SEC staff guidance for the acquisitionapplication of Marin Solar, we issued, on November 1, 2007, seven-year warrants to purchase 40,000 sharesASC Topic 740, Income Taxes. The Company has finalized its accounting for the income tax effects of Class A common stock at an exercise price of $3.20 per share. See Note 9, Mergers and Acquisitions. Notes to consolidated financial statementsthe 2017 Tax Act.
As of December 31, 2007, giving effect to options assumed from our predecessor, we had the following Class A common shares reserved for future issuance:
| | | Conversion of Class B common shares
| | 10,000,000 | Stock options under the Incentive Plan
| | 300,000 | Warrants outstanding
| | 40,000 | | | | Total shares reserved for future issuance
| | 10,340,000 | | | |
Each holder of shares of Class A common stock is entitled to one vote for each share held on all matters submitted to a vote of shareholders. Each share of Class B common stock is entitled to ten votes on all matters submitted to a vote of shareholders. There are no cumulative voting rights. All holders of shares of Class A common stock and shares of Class B common stock vote as a single class on all matters that are submitted to the shareholders for a vote. Accordingly, holders of a majorityThe tax effects recorded primarily include an estimate of the shares of Class A common stock and shares of Class B common stock entitled to vote in any election of directors may elect allimpact of the directors who stand for election. A required numberreduction in the U.S. tax rate on our deferred tax assets and liabilities in 2017. The Company had $0 of shareholders having the minimum number of votes that would be necessary to authorize or take action at a meeting at which all of the shares entitled to vote thereon were present and voted may consent to an action in writing and without a meeting under certain circumstances.
Shares of Class A common stock and shares of Class B common stock are entitled to receive dividends, if any, as may be declared by the board of directors out of legally available funds. In the event of a liquidation, dissolution or winding up of our Company, the shares of Class A common stock and shares of Class B common stock are entitled to share ratably in our assets remaining after the payment of all of our debts and other liabilities. Holders of shares of Class A common stock and shares of Class B common stock have no preemptive, subscription or redemption rights, and there are no redemption or sinking fund provisions applicable to the shares of Class A common stock and Class B common stock.
8. Income Taxes
In accordance with SAB 1-B1, we calculated income tax expense (benefit) for the years ended December 31, 2018 and deferred income tax balances as if we were a separate entity from Gaiam and had prepared our own separate tax returns. The resulting income taxes were settled through Payable to Gaiam.
Our provision for income taxes is comprised of the following:
| | | | | | | | | | | | | | | Years ended December 31, | | | (in thousands) | | 2005 | | 2006 | | | 2007 | | Current: | | | | | | | | | | | | Federal | | $ | — | | $ | (228 | ) | | $ | (114 | ) | State | | | — | | | (39 | ) | | | (20 | ) | | | | | | | | | | | | | | | | — | | | (267 | ) | | | (134 | ) | | | | | | | | | | | | | Deferred: | | | | | | | | | | | | Federal | | | 136 | | | 372 | | | | 186 | | State | | | 23 | | | 64 | | | | 32 | | | | | | | | | | | | | | | | | 159 | | | 436 | | | | 218 | | | | | | | | | | | | | | Total | | $ | 159 | | $ | 169 | | | $ | 84 | | | | | | | | | | | | | |
Notes to consolidated financial statements
2017. Variations from the federal statutory rate are as follows: | | | Years ended December 31, | | | (in thousands) | | 2018 | | | 2017 | | | Expected federal income tax expense (benefit) at statutory rate of 21% and 35% at December 31, 2018 and 2017, respectively | | $ | (8,888 | ) | | $ | (6,191 | ) | | Effect of permanent other differences | | | | | | | | | | Debt extinguishment | | | 5,145 | | | | 170 | | | Transaction Cost Amortization | | | 552 | | | | - | | | Other | | | 319 | | | | (28 | ) | | Effect of valuation allowance | | | 3,479 | | | | (12,572 | ) | | Other | | | 39 | | | | (1,147 | ) | | Impact of change in federal tax rate on deferred tax asset | | | - | | | | 20,479 | | | State income tax expense (benefit), net of federal benefit | | | (646 | ) | | | (690 | ) | | | | $ | - | | | $ | 21 | |
| | | | | | | | | | | (in thousands) | | 2005 | | 2006 | | 2007 | Expected federal income tax expense at statutory rate of 34% | | $ | 134 | | $ | 142 | | $ | 67 | Effect of permanent differences | | | 1 | | | 2 | | | 5 | State income tax expense, net of federal benefit and utilization of net operating loss | | | 24 | | | 25 | | | 12 | | | | | | | | | | | Income tax expense | | $ | 159 | | $ | 169 | | $ | 84 | | | | | | | | | | |
Deferred income taxes reflect net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net accumulated deferred income tax assetassets shown on a gross basis as of December 31, 20062018 and 20072017 are as follows: | | | | | | | | | | (in thousands) | | 2006 | | | 2007 | | Deferred tax assets (liabilities): | | | | | | | | | Current: | | | | | | | | | Provision for doubtful accounts | | $ | 72 | | | $ | 60 | | Inventory-related expense | | | 15 | | | | 4 | | Accrued liabilities | | | 24 | | | | 27 | | Prepaid and deferred catalog costs | | | (99 | ) | | | (108 | ) | Net operating loss carryforward | | | — | | | | 171 | | | | | | | | | | | Total current deferred tax assets | | $ | 12 | | | $ | 154 | | | | | | | | | | | Non-current: | | | | | | | | | Depreciation and amortization | | $ | (36 | ) | | $ | 16 | | Net operating loss carryforward | | | 2,720 | | | | 2,586 | | Other | | | — | | | | (278 | ) | | | | | | | | | | Total non-current deferred tax assets | | $ | 2,684 | | | $ | 2,324 | | | | | | | | | | | Total net deferred tax assets | | $ | 2,696 | | | $ | 2,478 | | | | | | | | | | |
| (in thousands) | | 2018 | | | 2017 | | | Deferred tax assets (liabilities) | | | | | | | | | | Provision for doubtful accounts | | $ | 138 | | | $ | 195 | | | Inventory-related expense | | | 195 | | | | 209 | | | Accrued liabilities | | | 367 | | | | 444 | | | Depreciation and amortization | | | 2,084 | | | | 2,128 | | | Net operating loss carry-forwards | | | 39,154 | | | | 35,754 | | | Other | | | 705 | | | | 719 | | | Total deferred tax assets | | | 42,643 | | | | 39,449 | | | Valuation allowance | | | (42,643 | ) | | | (39,449 | ) | | Total net deferred tax assets | | $ | - | | | $ | - | |
At December 31, 2006 and 2007, we2018, RGS had NOL carry forwards$140.7 million of approximately $6.8 million and $6.9 million, respectively, which may be used to offset future taxable income. Thesefederal net operating loss carryforwards expireexpiring, if not utilized, beginning in 2020. The Internal Revenue Code contains provisions that limit2020 and $14.1 million with no expiration. Additionally, the NOL available for useCompany had $142.8 million of state net operating loss carryforwards expiring, it not utilized, beginning in any given year upon2020. Utilization of the occurrence of certain events, including significant changes in ownership interest. A change in ownership of a company of greater than 50% within a three-year period results in an annual limitation on the utilization of NOL carryforwards from tax periods prior to the ownership changes. Our NOL carryforwards as of December 31, 2006 and 2007 arenet operating loss carry-forwards may be subject to annual limitation under applicable federal and state ownership change limitations due to changes in ownership. We expect the deferred tax assets atand, accordingly, net operating losses may expire before utilization. The Company has not completed a Section 382 analysis through December 31, 20062018 and 2007 to be fully recoverable through the reversal of taxable temporary differences in future years as a result of normal business activities unless we make a public offering of more than 20% of our capital, in which case we will effectively lose one year of our carryforward period and have to impair our deferred tax asset by approximately $0.2 million. Accordingly, no valuation allowances for deferred tax items were considered necessary as of December 31, 2006 or 2007.
We have entered into a tax sharing agreement with Gaiam providing for payments to Gaiam as we utilize our NOL in the future. See Note 10, Transactions With Gaiam.
Notes to consolidated financial statements
9. Mergers and Acquisitions
On November 1, 2007, we purchased 100% ownership of Marin Solar for $3.2 million in cash, plus direct acquisition costs of approximately $0.2 million. We acquired Marin Solar in order to expand our penetration into the Northern California solar energy market and enter the large installations market. The purchase agreement provides for additional consideration contingent upon the amount of revenue generated from certain potential customers and the collection of certain rebates. As additional consideration, we granted to the sellers warrants to purchase 40,000 shares of our Class A common stock at an exercise price of $3.20 per share. We havetherefore has not yet recognized the contingent consideration because its amount is not determinable beyond a reasonable doubt. At the time any of the contingent consideration becomes probable and can be estimated, we will recognize it as additional purchase price and allocate it to goodwill and other intangibles, as appropriate. Marin Solar’s results of operations for November and December 2007 are included in our Consolidated Statement of Operations for the Year Ended December 31, 2007.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. We are in the process of preparing valuations of certain intangible assets; thus, the allocation of the purchase price is subject to refinement. Goodwill is not expected to be deductible for tax purposes.
| | | | | (in thousands) | | November 1,
2007 | Current assets | | $ | 1,056 | Property and equipment | | | 243 | Goodwill and intangible assets | | | 3,342 | Other assets | | | 22 | | | | | Total assets acquired | | | 4,663 | | | | | Current liabilities | | | 1,261 | | | | | Net assets acquired | | $ | 3,402 | | | | |
The following is supplemental unaudited pro forma information for the Marin Solar acquisition as if we had acquired the business on January 1, 2006. The pro forma adjustments are based on currently available information and upon assumptions that we believe are reasonable in order to reflect, on a pro forma basis,determined the impact of this acquisition on our historical financial information.
| | | | | | | | | | | Pro Forma | | | | | Year ended
December 31, | | | | | 2006 | | 2007 | | | (in thousands, except per share data) | | (unaudited) | | Net revenue | | $ | 21,051 | | $ | 26,776 | | Operating income (loss) | | | 373 | | | (25 | ) | | | | | | | | | Net income (loss) | | $ | 197 | | $ | (51 | ) | | | | | | | | | Net income (loss) per share: | | | | | | | | Basic and diluted | | $ | 0.02 | | $ | (0.00 | ) | | | | | | | | |
Notes to consolidated financial statements
10. Transactions With Gaiam
Tax Sharing Agreement
After the date we cease to be a member of Gaiam’s consolidated group for federal income tax purposes, to the extent we become entitled to utilize loss carryforwards from our separate tax returns, we will distribute to Gaiam the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. Accordingly, we expect to recognize a valuation allowance against certain of our deferred tax assets as of the effective date of the tax sharing agreement. As of December 31, 2007, we had NOL carryforwards of approximately $6.9 million, meaning that such potential future payments to Gaiam, which would be made over a period of several years, would therefore aggregate to approximately $2.6 million. These NOL carryforwards expire beginning in 2020 if not utilized. Due to Gaiam’s step acquisitions of our company, we experienced “ownership changes”any ownership changes, as defined inunder Section 382 of the Internal Revenue Code. Accordingly, our useCode has occurred in prior years. Therefore, the net operating loss carryforwards above do not reflect any possible limitations and potential loss attributes to such ownership changes. However, the Company believes that upon completion of a Section 382 analysis, as a result of prior period ownership changes, substantially all of the NOL carryforwards is limited by annual limitations described in Sections 382 and 383 of the Internal Revenue Code. We expect our NOLsnet operating losses will be subject to be fully recoverable unless we make a public offering of more than 20% of our capital, in which case we will effectively lose one year of our carryforward period and have to impair our deferred tax assetlimitation.
The Company’s valuation allowance increased by approximately $0.2 million. Services Agreement
We have and will have a need for certain management and other services to be provided by Gaiam under an Intercorporate Services Agreement. These services may include, but are not limited to, executive, management, financial, audit, accounting, tax, treasury, human resources, payroll, technical, fulfillment, inventory management, customer service and certain occupancy and related office services as required from time to time. We have determined that it is not cost effective to obtain and separately maintain the personnel and infrastructure associated with these services, particularly the costs associated with attracting and maintaining on our payroll on a full time basis a full complement of skilled employees.
Services performed under this agreement will be provided under the direction of us, and Gaiam shall not have any power to act independently on our behalf other than as specifically authorized under the agreement or from time to time, by us. Gaiam and we will agree on the aggregate annual amount for a particular year for the services based upon a good faith estimate of the services required for that year and the estimated fees for such services. Upon a change to the annual amounts for a particular year, the parties will make appropriate payments to reflect such change. The annual amount and formulae for various services making up the annual amount, as well as any quarterly changes, must be approved in writing by each of Gaiam’s and our board of directors.
11. Subsequent Events
On January 1, 2008, our 88.4% owned subsidiary acquired certain of the assets of and assumed certain liabilities from Carlson Solar for $3.2$3.5 million in cash, plus direct acquisition costs of approximately $0.2 million. As part of the acquisition, as additional consideration, we granted warrants to purchase 30,000 shares of our Class A common stock at an exercise price of $3.20 per share, which will vest upon the closing of our proposed public offering of Class A common stock. The assets acquired were determined to have all inputs and processes necessary for the transferred assets to continue to conduct normal operations after acquisition; accordingly, the purchase price was treated as a business combination pursuant to SFAS No. 141,Business Combinations.
REAL GOODS SOLAR, INC.
Financial Statement Schedule II
Consolidated valuation and qualifying accounts
| | | | | | | | | | | | | | | | (in thousands) | | Balance at
Beginning
of Year | | Additions
Charged
(Credited) to
Costs and
Expenses(1) | | | Deductions | | | Balance at
End of
Year(1) | Allowance for doubtful accounts: | | | | | | | | | | | | | | | 2005 | | $ | 91 | | $ | 46 | | | $ | | 1 | | $ | 136 | 2006 | | $ | 136 | | $ | 61 | | | $ | | 14 | | $ | 183 | 2007 | | $ | 183 | | $ | (10 | ) | | $ | | 22 | | $ | 151 |
(1)
| Includes reserves associated with acquired Marin Solar, Inc. of $41 in 2007.
|
Independent auditors’ report
Board of Directors and Shareholders
Marin Solar, Inc.
We have audited the accompanying balance sheet of Marin Solar, Inc. as of December 31, 2006 and the related statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2006 and the ten months ended October 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting2018 as a basis for designing audit procedures that are appropriate in the circumstances, but notresult of its operating loss for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Marin Solar, Inc. as of December 31, 2006, and the results of its operations and its cash flows for the year ended December 31, 2006 and the ten months ended October 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
/s/ Ehrhardt Keefe Steiner & Hottman PC
February 1, 2008
Denver, Colorado
MARIN SOLAR, INC.
Balance sheet
| | | | | | | | As of
December 31,
2006 | | | ASSETS | | | | | Current assets: | | | | | Cash | | $ | 3,394 | | Accounts receivable, net | | | 477,117 | | Related party receivables | | | 1,913 | | Inventory | | | 126,374 | | Deferred costs on uncompleted contracts | | | 1,247,343 | | | | | | | Total current assets | | | 1,856,141 | | Property and equipment, net | | | 127,078 | | Deposits | | | 4,079 | | | | | | | Total assets | | $ | 1,987,298 | | | | | | | | LIABILITIES AND SHAREHOLDERS’ DEFICIT | | | | | Current liabilities: | | | | | Lines of credit, banks | | $ | 185,000 | | Accounts payable | | | 446,891 | | Accrued expenses | | | 73,288 | | Current portion of secured loans payable | | | 14,256 | | Customer rebates payable | | | 33 | | Deferred revenue on uncompleted contracts | | | 1,559,178 | | | | | | | Total current liabilities | | | 2,278,646 | | | | Secured loans payable, less current portion | | | 72,832 | | | | | | | Total liabilities | | | 2,351,478 | | | | | | | Commitments and contingencies (Note 14) | | | | | Shareholders’ deficit: | | | | | Preferred stock, par value $100 per share; 5,000 shares authorized: none issued or outstanding | | | — | | Common stock, 1,000 shares authorized without par value; 100 shares issued and outstanding | | | 10,000 | | Additional paid-in capital | | | 78,644 | | Accumulated deficit | | | (452,824 | ) | | | | | | Total shareholders’ deficit | | | (364,180 | ) | | | | | | Total liabilities and shareholders’ deficit | | $ | 1,987,298 | | | | | | |
See accompanying notes to financial statements.
MARIN SOLAR, INC.
Statements of operations
| | | | | | | | | | | | For the Year
ended
December 31,
2006 | | | For the Ten
Months ended
October 31,
2007 | | Revenue | | $ | 4,239,264 | | | $ | 7,853,290 | | Cost of sales | | | 3,330,157 | | | | 6,292,594 | | | | | | | | | | | Gross profit | | | 909,107 | | | | 1,560,696 | | | | | | | | | | | Selling, general and administrative | | | 909,472 | | | | 1,726,171 | | | | | | | | | | | Operating loss | | | (365 | ) | | | (165,475 | ) | | | | | | | | | | Other expenses: | | | | | | | | | Interest expense | | | (28,969 | ) | | | (41,303 | ) | Other income | | | 4,730 | | | | 108 | | | | | | | | | | | Total other expenses | | | (24,239 | ) | | | (41,195 | ) | | | | | | | | | | Net loss before income taxes | | | (24,604 | ) | | | (206,670 | ) | Income tax expense | | | 800 | | | | 800 | | | | | | | | | | | Net loss | | $ | (25,404 | ) | | $ | (207,470 | ) | | | | | | | | | | Net loss per share: | | | | | | | | | Basic and diluted | | $ | (254 | ) | | $ | (2,075 | ) | | | | | | | | | | Shares used in computing net loss per share: | | | | | | | | | Basic and diluted | | | 100 | | | | 100 | | | | | | | | | | |
See accompanying notes to financial statements.
MARIN SOLAR, INC.
Statement of changes in shareholders’ deficit
| | | | | | | | | | | | | | | | | | | | Common Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | | Total
Shareholders’
Deficit | | | | | Shares | | Amount | | | | Balance at December 31, 2005 | | 100 | | $ | 10,000 | | $ | 2,847 | | $ | (427,420 | ) | | $ | (414,573 | ) | Contribution of capital | | — | | | — | | | 75,797 | | | — | | | | 75,797 | | Net loss | | — | | | — | | | — | | | (25,404 | ) | | | (25,404 | ) | | | | | | | | | | | | | | | | | | Balance at December 31, 2006 | | 100 | | $ | 10,000 | | $ | 78,644 | | $ | (452,824 | ) | | $ | (364,180 | ) | | | | | | | | | | | | | | | | | |
See accompanying notes to financial statements.
MARIN SOLAR, INC.
Statements of cash flows
| | | | | | | | | | | | For the Year
ended
December 31,
2006 | | | For the Ten
Months ended
October 31,
2007 | | Cash flows used in operating activities: | | | | | | | | | Net loss | | $ | (25,404 | ) | | $ | (207,470 | ) | | | | | | | | | | | | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | Depreciation | | | 30,365 | | | | 56,455 | | Provision for doubtful accounts | | | 41,790 | | | | 1,032 | | | | | Changes in assets and liabilities: | | | | | | | | | Decrease (increase) in assets: | | | | | | | | | Accounts receivable | | | (397,391 | ) | | | (229,474 | ) | Related party receivables | | | (1,913 | ) | | | (13,504 | ) | Inventory | | | (126,374 | ) | | | 101,317 | | Deferred costs on uncompleted contracts | | | (931,005 | ) | | | 961,902 | | Deposits | | | (3,222 | ) | | | (18,000 | ) | | | | Increase (decrease) in liabilities: | | | | | | | | | Accounts payable | | | 121,983 | | | | (38,181 | ) | Accrued expenses | | | (7,054 | ) | | | 74,551 | | Customer rebates payable | | | (7,407 | ) | | | 260,033 | | Deferred revenue on uncompleted contracts | | | 1,163,756 | | | | (1,202,378 | ) | | | | | | | | | | Total adjustments | | | (116,472 | ) | | | (46,247 | ) | | | | | | | | | | Net cash used in operating activities | | | (141,876 | ) | | | (253,717 | ) | | | | | | | | | | | | | Cash flows used in investing activities: | | | | | | | | | Payments to acquire property and equipment | | | (91,469 | ) | | | (193,428 | ) | | | | | | | | | | | | | Cash flows provided by (used in) financing activities: | | | | | | | | | Proceeds from issuance of preferred stock | | | — | | | | 350,000 | | Proceeds from secured loans | | | — | | | | 122,906 | | Payments on secured loans | | | (54,214 | ) | | | — | | Net proceeds (payments) under lines of credit | | | 158,110 | | | | (4,354 | ) | Capital contributions | | | 75,797 | | | | — | | | | | | | | | | | Net cash provided by financing activities | | | 179,693 | | | | 468,552 | | | | | | | | | | | Net increase (decrease) in cash | | | (53,652 | ) | | | 21,407 | | Cash, beginning of period | | | 57,046 | | | | 3,394 | | | | | | | | | | | Cash, end of period | | $ | 3,394 | | | $ | 24,801 | | | | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | Income taxes paid | | $ | 800 | | | $ | 800 | | | | | | | | | | | Interest paid | | $ | 28,969 | | | $ | 30,104 | | | | | | | | | | |
See accompanying notes to financial statements.
Notes to financial statements
1. Summary of Significant Accounting Policies
Business Activity
Marin Solar, Inc. (the “Company”)year. The valuation allowance was incorporated in 2002 in California, and designs and installs solar systems for residential and commercial properties in Northern California.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value
Unless otherwise indicated, the fair values of all reported assets and liabilities, which represent financial instruments, none of which are held for trading purposes, approximate the carrying values of such accounts.
Concentration of Credit Risk
Cash consists principally of cash deposited in money market and checking accounts, which at times may exceed federally insured limits; however, the Company has not experienced any losses on such accounts.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of specific customer accounts and an assessment of economic risks, as well as the aging of the accounts receivable.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment is valued at cost. Depreciation is being provided by use of the straight-line method over the estimated useful lives of the assets.
Revenue Recognition
The Company recognizes revenuedetermined in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, using either the completed contract method or the percentage of completion method.
Notes to financial statements
The Company recognizes revenue from residential solar energy system installations (less than 250 kilowatts) using the completed contract method. Revenue is deferred until the contract is considered substantially complete, which is when remaining costs and potential risks are insignificant in amount, which typically occurs upon final departure from the worksite or passing of building inspection.
The Company recognizes revenue from commercial solar system installations (equal to or greater than 250 kilowatts) using the percentage of completion method. Revenue is recognized based on contract milestones achieved (output measure). We had no contracts accounted for under the percentage of completion method for either of the periods ended December 31, 2006 or October 31, 2007.
Deferred Revenue on Uncompleted Contracts
The unearned portion of contracts is classified as deferred revenue. Related costs are also deferred until the revenue is recognized.
Advertising
The Company expenses advertising costs as incurred. Advertising expense totaled $16,411 and $65,128 for the year ended December 31, 2006 and for the ten months ended October 31, 2007, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
2. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation 48,Accounting for Uncertainty in Income Taxes (“FIN 48”)—an interpretation of FASB No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision on whether or not to file in a particular jurisdiction. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. The provisions of FIN 48 are to be applied to all tax positionsASC 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a valuation allowance. Based upon initial adoption of this standard. Only tax positions that meet a “more-likely-than-not” recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 is reported as an adjustment to the opening balance of retained earnings. FIN 48 is effective for years beginning after December 15, 2007. The Company expects the adoption of this accounting standard will increase the level of disclosure that the Company provides regarding its tax positions. The adoption of FIN 48 is not expected to have a material impact onavailable objective evidence and the Company’s consolidated financial position and resultshistory of operations.
Notes to financial statements
3. Related Party Receivables
Related party receivables consist of advances to the shareholders representing personal expenses of $1,913 at December 31, 2006.
4. Inventory
Inventory consists primarily of finished goods used in solar systems. The Company had finished goods inventory of $126,374 at December 31, 2006.
5. Property and Equipment
Property and equipmentlosses, management believes it is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over estimated useful lives (generally three to seven years). A summary of property and equipment at December 31, 2006 is as follows:
| | | | | Automobiles | | $ | 161,333 | | Computer equipment | | | 22,585 | | Furniture and machinery | | | 32,448 | | | | | | | | | | 216,366 | | Less: accumulated depreciation | | | (89,288 | ) | | | | | | | | $ | 127,078 | | | | | | |
Depreciation expense was $30,365 and $56,455 for the year ended December 31, 2006 and for the ten months ended October 31, 2007, respectively.
6. Accounts Payable—Major Vendor
Purchases from two suppliers amounted to approximately $3.3 million for year ended December 31, 2006 with $393,264 outstanding at year end. Purchases from one supplier amounted to approximately $3.8 million for the ten months ended October 31, 2007.
7. Accrued Liabilities
A summary of accrued expenses for the year ended December 31, 2006 is as follows:
| | | | Payroll liabilities | | $ | 20,323 | Accrued warranty | | | 25,000 | Other liabilities | | | 27,965 | | | | | Total | | $ | 73,288 | | | | |
The Company warranties the installation of its solar energy systems for 10 years, as required by California law, and the estimated warranty liability is based upon historical claim experience.
Notes to financial statements
8. Lines of Credit, Banks
At December 31, 2006 the Company had two revolving lines of credit with two separate banks providing for maximum borrowings of $35,000 and $150,000, with interest payable at 17.50% and 10.25%, respectively. Outstanding borrowings on all lines were $185,000 at December 31, 2006. These lines were secured by substantially all assets of the Company. All outstanding balances were repaid on November 1, 2007. See Note 17, Subsequent Event.
9. Customer Rebates Payable
The Emerging Renewable Program from California Energy Commission (“CEC”) offers rebates to those who install solar energy systems. Upon execution of the contract, a reservation application for the rebate is sent to CEC, and the rebate received by the Company is credited to the customer or credited as payment for the system cost.
10. Secured Loans Payable
The Company had secured vehicle loans payable of $87,088 at December 31, 2006. The loans were repaid as of November 1, 2007. See Note 17, Subsequent Event.
11. Preferred Stock
In 2006, the Company authorized 5,000 shares of preferred stock with $100 par value. In 2007, the Company issued 3,500 shares of preferred stock for $350,000. The material terms of the Company’s preferred stock are as follows:
Dividends
The preferred stock is entitled to receive, out of funds legally available, cumulative dividends at the annual rate of 10% per share (based on par value) for 18 months from the date of issuance, and at 11% per share thereafter. The cumulative dividends are payable in cash on a quarterly basis on the first day of April, July, October, and January if declared by the Board of Directors. No dividends or other distributions shall be made with respect to the common stock until the cumulative dividends on the preferred stock for all past dividend periods and for the then-current three-month dividend period shall have been declared and paid or set apart. As of the date the Company was acquired, the aggregate cumulative dividends in arrears were approximately $22,000. See Note 17, Subsequent Event.
Voting rights
Except as otherwise provided by law, the preferred stock has no voting rights.
Liquidation Preference
Upon the voluntary or involuntary liquidation, winding up or dissolution of the Company, out of the assets available for distribution to shareholders after payment of liabilities, the preferred stock is entitled to receive, in preference to any payment on the common stock, an amount equal to $100 per share plus cumulative dividends accrued and unpaid to the date payment is made available to the preferred stock.
Notes to financial statements
Redemption
The Company at the option of the Board of Directors, may redeem the whole or from time to time redeem any part of the preferred shares outstanding by paying in cash the sum of $100 per share, plus all dividends accrued, unpaid and accumulated to the date fixed for redemption.
12. Common Stock
The Company is authorized to issue 1,000 shares of common stock without par value. During the periods presented there were 100 shares of common stock issued and outstanding.
13. Income Taxes
Deferred income taxes are provided for the temporary differences in recognizing revenue and expenses for financial reporting and income tax purposes. The temporary differences are primarily due to differing methods for recording bad debts, depreciation, inventory, accrued salaries and vacation pay, and net operating loss carryforwards.
The Company accounts for income taxes under the asset and liability method in accordance with SFAS No. 109,Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded for deferred tax assets where it appears more likely than not that the Companynet deferred tax assets will not be able to recoverrealized. At December 31, 2018, the Company has a valuation allowance against its deferred tax asset.
The provision for income taxes consistsassets net of the following:expected income from the reversal of its deferred tax liabilities.
| | | | | | | | | | December 31,
2006 | | October 31,
2007 | Current tax expense: | | | | | | | Federal | | $ | — | | $ | — | State | | | 800 | | | 800 | | | | | | | | Deferred income tax expenses | | | — | | | — | | | | | | | | Total income taxes | | $ | 800 | | $ | 800 | | | | | | | |
The Company’s predecessor, Real Goods Trading Corporation, was acquired by Gaiam, Inc. (now known as Gaia, Inc. and hereinafter as Gaia) in 2001. Gaia operated Real Goods Trading Corporation essentially as a separate business until 2008 when operations were consolidated into the corporate entity, Real Goods Solar, Inc., upon its formation. Following the Company’s initial public offering, a tax sharing agreement was entered into with Gaia. The Company is required, under the terms of its tax sharing agreement with Gaia, to distribute to Gaia the tax effect of certain tax loss carryforwards as utilized by the Company in preparing its federal, state and local income tax returns. At December 31, 2018, utilizing the new federal income tax rate of 21%, the Company estimates that the maximum amount of such distributions to Gaia could aggregate $1.1 million. Variations15. Segment Information
Financial information for the Company’s segments and a reconciliation of the total of the reportable segments’ income (loss) from operations (measures of profit or loss) to the federal statutory rateCompany’s consolidated net loss are as follows: | (in thousands) | | 2018 | | | 2017 | | | Contract revenue: | | | | | | | | | | Solar Division | | | 12,703 | | | | 15,586 | | | POWERHOUSE™ | | | - | | | | - | | | Other | | | 25 | | | | 6 | | | Consolidated contract revenue | | | 12,728 | | | | 15,592 | | | Operating loss from continuing operations: | | | | | | | | | | Solar Division | | | (5,855 | ) | | | (8,729 | ) | | POWERHOUSE™ | | | (598 | ) | | | (20 | ) | | Other | | | (8,518 | ) | | | (8,637 | ) | | Operating Loss | | | (14,971 | ) | | | (17,386 | ) | | Reconciliation of consolidated loss from operations to consolidated net loss: | | | | | | | | | | Other income | | | 1,063 | | | | 68 | | | Change in fair value of derivative liabilities and loss on debt extinguishment | | | (27,134 | ) | | | (379 | ) | | Amortization of debt discount and deferred loan costs | | | (1,042 | ) | | | (3 | ) | | Net loss | | | (42,084 | ) | | | (17,700 | ) |
| | | | | | | | | | | | December 31,
2006 | | | October 31,
2007 | | Expected federal income tax benefit at statutory rate of 34% | | $ | (8,365 | ) | | $ | (70,268 | ) | Effect of permanent differences | | | 30 | | | | 248 | | State income tax benefit, net of federal benefit | | | (1,434 | ) | | | (12,049 | ) | Change in valuation allowance | | | 10,569 | | | | 82,869 | | | | | | | | | | | Income tax expense | | $ | 800 | | | $ | 800 | | | | | | | | | | |
Notes to financial statements
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| | | | | | | | December 31,
2006 | | Deferred tax assets: | | | | | Allowance for doubtful accounts | | $ | 17,900 | | Net operating loss carryforwards | | | 109,600 | | Property and equipment | | | 30,600 | | Accrued warranty | | | 10,700 | | Charitable contributions | | | 2,300 | | State income taxes | | | 300 | | Research and development credits | | | 3,200 | | | | | | | | | | 174,600 | | Less: valuation allowance | | | (174,600 | ) | | | | | | Total deferred tax assets | | $ | — | | | | | | |
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Therefore, the net deferred tax asset has been offset fully by a valuation allowance.
NOL carryforwards of approximately $540,000 for federal and $545,000 for state, are available as of October 31, 2007 to be applied against future taxable income. The net operating loss carryforwards expire in tax years 2022 -2027 for federal purposes and in tax years 2012-2017 for state purposes. Utilization of the Company’s federal net operating loss carryforwards may be subject to an annual limitation due to the “change of ownership” provisions of the Tax Reform Act of 1986. The annual limitation may result in the expiration of net operating loss carryforwards before utilization.
14. Commitments and Contingencies
The Company leases its operating facility under a noncancellable operating lease expiring on December 31, 2009. The following is a schedule, by yearreconciliation of future minimum rental payments required under the operating lease are as follows:
| | | | Two months ending December 31, 2007 | | $ | 21,500 | Year ending December 31, | | | | 2008 | | | 132,000 | 2009 | | | 108,000 | | | | | Total | | $ | 261,500 | | | | |
Rent expense amountedreportable segments’ assets to $22,500 and $103,769 for the year ended December 31, 2006 and for the ten months ended October 31, 2007, respectively.
15. Segment and Geographic Information
The Company operates in a single business segment, the design and installation of solar energy systems to residential and commercial markets in Northern California.
Notes to financial statements
16. Major Customers
No customer accounted for more than 10% of the revenue for the year ended December 31, 2006. Two customers accounted for approximately $1,850,000, or 25%, of revenue for the ten months ended October 31, 2007.
Based on the Company’s assessment, an allowance for doubtful accounts of $41,790 was maintained at December 31, 2006.
17. Subsequent Event
In November 2007, the Company entered into a stock purchase agreement with Real Goods Marin, Inc. The shareholders will receive cash consideration of $3.2 million for the common stock held by the shareholders. The cash consideration was paid upon the closing date of November 15, 2007.
Independent auditors’ report
Board of Directors and Shareholders
Carlson Solar
We have audited the accompanying balance sheets of Carlson Solar as of December 31, 2006 and 2007 and the related statements of operations, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carlson Solar as of December 31, 2006 and 2007, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Ehrhardt Keefe Steiner & Hottman PC
February 1, 2008
Denver, Colorado
CARLSON SOLAR
Balance sheets
| | | | | | | | | | As of December 31, | | | | 2006 | | 2007 | | ASSETS | | | | | | | Current assets: | | | | | | | Cash | | $ | 90,275 | | $ | 309,473 | Accounts receivable, net | | | 303,640 | | | 336,475 | Inventory | | | 1,063,160 | | | 1,261,523 | Prepaid expenses and other current assets | | | 24,131 | | | 900 | Deferred costs on uncompleted contracts | | | 1,091,478 | | | 193,190 | | | | | | | | Total current assets | | | 2,572,684 | | | 2,101,561 | Property and equipment, net | | | 142,145 | | | 198,522 | Deposits | | | 1,564 | | | 1,366 | | | | | | | | Total assets | | $ | 2,716,393 | | $ | 2,301,449 | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | Current liabilities: | | | | | | | Line of credit, bank | | $ | 159,948 | | $ | — | Accounts payable | | | 601,723 | | | 507,239 | Accrued expenses | | | 202,068 | | | 216,924 | Deferred revenue on uncompleted contracts | | | 883,249 | | | 251,420 | Current portion of secured loans payable | | | 1,521 | | | — | | | | | | | | Total current liabilities | | | 1,848,509 | | | 975,583 | Secured loans payable, less current portion | | | 14,064 | | | — | | | | | | | | Total liabilities | | | 1,862,573 | | | 975,583 | | | | | | | | Commitments and contingencies (Note 10) | | | | | | | Shareholders’ equity | | | | | | | Common stock; 100,000 authorized without par value; 75,000 shares issued and outstanding as of December 31, 2006 and 2007 | | | 2,000 | | | 2,000 | Additional paid-in capital | | | 2,000 | | | 2,000 | Retained earnings | | | 849,820 | | | 1,321,866 | | | | | | | | Total shareholders’ equity | | | 853,820 | | | 1,325,866 | | | | | | | | Total liabilities and shareholders’ equity | | $ | 2,716,393 | | $ | 2,301,449 | | | | | | | |
See accompanying notes to financial statements.
CARLSON SOLAR
Statements of operations
| | | | | | | | | | | | For the Year ended
December 31, | | | | | 2006 | | | 2007 | | | | | | | | | | | | | | Revenue | | $ | 3,356,549 | | | $ | 5,969,571 | | Cost of sales | | | 2,333,058 | | | | 4,216,468 | | | | | | | | | | | Gross profit | | | 1,023,491 | | | | 1,753,103 | | | | | | | | | | | Selling, general and administrative | | | 659,817 | | | | 664,429 | | | | | | | | | | | Operating income | | | 363,674 | | | | 1,088,674 | | | | | | | | | | | Other expenses/(income): | | | | | | | | | Interest expense/(income), net | | | 14,522 | | | | (1,520 | ) | Other expenses/(income), net | | | (10,521 | ) | | | (8,000 | ) | | | | | | | | | | Total other expenses/(income) | | | 4,001 | | | | (9,520 | ) | | | | | | | | | | Net income before income taxes | | | 359,673 | | | | 1,098,194 | | Income tax expense | | | 11,923 | | | | 25,995 | | | | | | | | | | | Net income | | $ | 347,750 | | | $ | 1,072,199 | | | | | | | | | | | Net income per share: | | | | | | | | | Basic and diluted | | $ | 4.64 | | | $ | 14.30 | | | | | | | | | | | Shares used in computing net income per share: | | | | | | | | | Basic and diluted | | | 75,000 | | | | 75,000 | | | | | | | | | | |
See accompanying notes to financial statements.
CARLSON SOLAR
Statement of changes in shareholders’ equity
| | | | | | | | | | | | | | | | | | | | Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | | Total
Shareholders’
Equity | | | | | | | | | Shares | | Amount | | | | Balance at December 31, 2005 | | 75,000 | | $ | 2,000 | | $ | 2,000 | | $ | 511,688 | | | $ | 515,688 | | Distribution to shareholders | | | | | | | | | | | (9,618 | ) | | | (9,618 | ) | Net income | | — | | | — | | | — | | | 347,750 | | | | 347,750 | | | | | | | | | | | | | | | | | | | Balance at December 31, 2006 | | 75,000 | | | 2,000 | | | 2,000 | | | 849,820 | | | | 853,820 | | Distribution to shareholders | | — | | | — | | | — | | | (600,153 | ) | | | (600,153 | ) | Net income | | — | | | — | | | — | | | 1,072,199 | | | | 1,072,199 | | | | | | | | | | | | | | | | | | | Balance at December 31, 2007 | | 75,000 | | $ | 2,000 | | $ | 2,000 | | $ | 1,321,866 | | | $ | 1,325,866 | | | | | | | | | | | | | | | | | | |
See accompanying notes to financial statements.
CARLSON SOLAR
Statements of cash flows
| | | | | | | | | | | | For the Year ended
December 31, | | | | | 2006 | | | 2007 | | Cash flows provided by operating activities: | | | | | | | | | Net income | | $ | 347,750 | | | $ | 1,072,199 | | | | | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | Depreciation | | | 51,137 | | | | 37,949 | | Provision for doubtful accounts | | | 1,088 | | | | — | | | | | Changes in assets and liabilities: | | | | | | | | | Decrease (increase) in assets: | | | | | | | | | Accounts receivable | | | 19,881 | | | | (32,835 | ) | Inventory | | | (384,031 | ) | | | (198,363 | ) | Deferred costs on uncompleted contracts | | | (1,091,478 | ) | | | 898,288 | | Prepaid expenses and other current assets | | | (935 | ) | | | 23,231 | | Deposits | | | (1,564 | ) | | | 198 | | | | | Increase (decrease) in liabilities: | | | | | | | | | Accounts payable | | | 271,312 | | | | (94,484 | ) | Accrued expenses | | | 142,641 | | | | 14,856 | | Deferred revenue on uncompleted contracts | | | 677,683 | | | | (631,829 | ) | | | | | | | | | | Total adjustments | | | (314,266 | ) | | | 17,011 | | | | | | | | | | | Net cash provided by operating activities | | | 33,484 | | | | 1,089,210 | | | | | | | | | | | | | | Cash flows used for investing activity: | | | | | | | | | Payments to acquire property and equipment | | | (70,114 | ) | | | (94,326 | ) | | | | | | | | | | Cash flows used for financing activities: | | | | | | | | | Net proceeds (payments) under line of credit | | | (40,491 | ) | | | (159,948 | ) | Distribution to shareholders | | | (9,618 | ) | | | (600,153 | ) | Payments on long-term debt | | | (16,694 | ) | | | (15,585 | ) | | | | | | | | | | Net cash used for financing activities | | | (66,803 | ) | | | (775,686 | ) | | | | | | | | | | Net increase (decrease) in cash | | | (103,433 | ) | | | 219,198 | | Cash, beginning of year | | | 193,708 | | | | 90,275 | | | | | | | | | | | Cash, end of year | | $ | 90,275 | | | $ | 309,473 | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | Income taxes paid | | $ | 2,182 | | | $ | 26,990 | | | | | | | | | | | Interest paid | | $ | 16,485 | | | $ | 6,139 | | | | | | | | | | |
See accompanying notes to financial statements.
Notes to financial statements
1. Summary of Significant Accounting Policies
Business Activity
Carlson Solar (the “Company”) was incorporated in 2001 in California and designs and installs solar energy systems for residential and commercial properties in Southern California.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value
Unless otherwise indicated, the fair values of all reported assets and liabilities, which represent financial instruments, none of which are held for trading purposes, approximate the carrying values of such accounts.
Concentration of Credit Risk
Cash consists principally of cash deposited in money market and checking accounts, which at times may exceed federally insured limits; however, the Company has not experienced any losses on such accounts.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of specific customer accounts and an assessment of economic risks, as well as the aging of the accounts receivable.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market.
Property and Equipment
The Company values property and equipment at cost. Depreciation is being provided by use of the straight-line method over the shorter of the estimated useful lives of the assets or the term of the lease for leasehold improvements.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, using either the completed contract method or the percentage of completion method.
Notes to financial statements
The Company recognizes revenue from residential solar energy system installations (less than 250 kilowatts) using the completed contract method. Revenue is deferred until the contract is considered substantially complete, which is when remaining costs and potential risks are insignificant in amount, which typically occurs upon final departure from the worksite or passing of building inspection.
The Company recognizes revenue from commercial solar system installations (equal to or greater than 250,000 kilowatts) using the percentage of completion method. Revenue is recognized based on contract milestones achieved (output measure).
Deferred Revenue on Uncompleted Contracts
The unearned portion of contracts is classified as deferred revenue. Related costs are also deferred until the revenue is recognized.
Advertising
The Company expenses advertising costs as incurred. Advertising expense totaled $28,469 and $26,971 for the years ended December 31, 2006 and 2007, respectively.
Income Taxes
The Company is an S corporation under the provisions of the Internal Revenue Code of 1986, as amended. For federal and certain state income tax purposes, the Company is not subject to tax on its income. The Company’s income is allocated to its shareholders. The Company may be subject to state income taxes in those states that do not recognize S corporations and to additional types of taxes including franchise and business taxes.
2. Recent Accounting Pronouncements
In September 2006, FASB issued SFAS No. 157,Fair Value Measurements (“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows.
In July 2006, FASB issued FASB Interpretation 48,Accounting for Uncertainty in Income Taxes (“FIN 48”)—an interpretation of FASB No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision on whether or not to file in a particular jurisdiction. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet a “more-likely-than-not” recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 is reported as an adjustment to the opening balance of retained earnings. FIN 48 is effective for years beginning after December 15, 2007. The Company expects the adoption of this accounting standard will increase the level of disclosure that the Company provides regarding its tax positions. The adoption of FIN 48 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.total assets. The Other segment includes certain unallocated corporate amounts.
| (in thousands) | | 2018 | | | 2017 | | | Total assets: | | | | | | | | | | Solar Division | | $ | 10,615 | | | $ | 9,840 | | | POWERHOUSE™ | | | 1,366 | | | | 1,140 | | | Other | | | 4,279 | | | | 3,278 | | | | | $ | 16,260 | | | $ | 14,258 | |
Notes to financial statements16. Subsequent Events
3. Inventory
Inventory consists primarily of finished goods used inOn March 29, 2019, the Company announced an operational realignment to exit its mainland residential solar systems.The Company had finished goods inventory of $1,063,160 and $1,261,523business so as of December 31, 2006 and 2007, respectively.
4. Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computedto focus on the straight-line method over estimated useful lives (generally three to seven years). A summary of propertyPOWERHOUSE™ in-roof shingle market. Revenues and equipment is as follows:net loss in 2018 for the mainland residential solar business were approximately $8.9 million and $6.3 million, respectively.
On April 4, 2019, the Company closed a registered offering in which it issued and sold (i) 15,938,280 shares of Class A common stock, (ii) prepaid Series S Warrants to purchase 1,430,141 shares of Class A common stock and (iii) Series R Warrants to purchase 17,368,421 shares of Class A common stock pursuant to the terms of the Securities Purchase Agreement dated April 2, 2019 between the Company and the investors. The investors paid $0.19 per share of Class A common stock and $0.18 per share of Class A common stock underlying the Series S Warrant for aggregate gross proceeds of $3.3 million at the closing and before $0.34 million of expenses. | | | | | | | | | | | | December 31, | | | | | 2006 | | | 2007 | | Automobiles | | $ | 290,418 | | | $ | 376,370 | | Computer equipment | | | 23,470 | | | | 18,056 | | Machine and equipment | | | 10,534 | | | | 22,587 | | Furniture and machinery | | | 7,352 | | | | 7,030 | | Leasehold improvements | | | — | | | | 2,057 | | | | | | | | | | | | | | 331,774 | | | | 426,100 | | Less: accumulated depreciation | | | (189,629 | ) | | | (227,578 | ) | | | | | | | | | | | | $ | 142,145 | | | $ | 198,522 | | | | | | | | | | |
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS Depreciation expense was $51,137 and $37,949 for the years ended December 31, 2006 and 2007, respectively.
5. Accounts Payable – Major Vendor
During the years ended December 31, 2006 and 2007, the Company purchased the majority of its inventory from two vendors.
6. Accrued Liabilities
A summary of accrued expenses is as follows:
| | | | | | | | | | December 31, | | | | 2006 | | 2007 | Due to Real Goods | | $ | — | | $ | 66,896 | Sales tax payable | | | 24,426 | | | 51,347 | Credit card payable | | | 10,120 | | | 32,171 | Accrued warranty | | | 25,000 | | | 25,000 | Payroll liabilities | | | 14,452 | | | — | Accrued profit sharing | | | 81,762 | | | — | Customer deposits | | | 29,000 | | | — | Other liabilities | | | 17,508 | | | 41,510 | | | | | | | | | | $ | 202,268 | | $ | 216,924 | | | | | | | |
Notes to financial statements
The Company warranties the installation of its solar energy systems for 10 years as required by California law, and the estimated warranty liability is based upon historical claim experience.
7. Line of Credit, Bank
At December 31, 2006, the Company had a line of credit with one bank providing for maximum borrowings of $250,000 with interest payable at 7.25%. The line was secured by substantially all assets of the Company. All outstanding balances were repaid during 2007.
8. Secured Loans Payable
The Company had one secured vehicle loan payable of $15,585 at December 31, 2006 with interest rate of 7.99%. The loan was repaid during 2007.
9. Common Stock
The Company is authorized to issue 100,000 shares of common stock without par value. As of December 31, 2007 and 2006, 75,000 shares of common stock were issued and are outstanding.
10. Commitments and Contingencies
The Company leases its operating facility under a “month-to-month” operating lease. The Company can terminate the lease at any time with 30 days notice.
Rent expense amounted to $29,209 and $25,622, for the years ended December 31, 2006 and 2007, respectively.
11. Segment and Geographic Information
The Company operates in a single business segment: the design and installation of solar power systems to the residential and commercial market in Southern California.
12. Major Customers
One customer accounted for approximately $858,000 or 14% of sales for the year ended December 31, 2007 with no amounts outstanding as of December 31, 2007.
13. Defined Contribution Plan
The Company has adopted a defined contribution plan, which covers substantially all employees. Contributions to the plan are discretionary, and were $0 and $81,762 for the years ended December 31, 2006 and 2007.
14. Subsequent Event
In January 2008, the Company entered into an asset purchase agreement with Real Goods Carlson, Inc. and certain individuals. The sellers will receive $2,550,000, plus the closing inventory value of $1,235,260, subject to adjustment, in exchange for certain assets of the Company.
Part II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution The following table lists various expenses other than underwriting discounts and commissions, we expect to incurincurred in connection with the sale of the Class A common stocksecurities being registered hereby. Allwill be borne by the amounts shown are estimates, exceptregistrant. Other than the SEC registration fee, the FINRA filing fee and the Nasdaq Global Market fee.amounts stated are estimates. | SEC Registration Fee | | $ | 511.56 | | | Legal Fees and Expenses | | $ | 40,000 | | | Accounting Fees and Expenses | | $ | 20,000 | | | Miscellaneous | | $ | 10,000 | | | Total | | $ | 70,511.56 | |
| | | | | | | Amount to
be Paid | SEC registration fee | | $ | 2,260 | FINRA filing fee | | | 6,250 | Nasdaq Global Market fee | | | 105,000 | Printing and engraving costs | | | * | Legal fees and expenses | | | * | Accounting fees and expenses | | | * | Blue sky qualification fees and expenses | | | * | Transfer agent and registrar fees | | | * | Miscellaneous | | | * | | | | | Total | | $ | * | | | | |
* | To be completed by amendment. |
Item 14. Indemnification of Directors and Officers The Colorado lawBusiness Corporation Act (the “CBCA”) generally provides forthat a corporation may indemnify a person made party to a proceeding because the person is or was a director against liability incurred in the proceeding if: the person’s conduct was in good faith; the person reasonably believed, in the case of conduct in an official capacity with the corporation, that such conduct was in the corporation’s best interests, and, in all other cases, that such conduct was at least not opposed to the corporation’s best interests; and, in the case of any criminal proceeding, the person had no reasonable cause to believe that the person’s conduct was unlawful. The CBCA prohibits such indemnification of directors, officers and other employees in certain circumstances (C.R.S. § 7-109-101 et. seq. (1994)) and fora proceeding by or in the elimination or limitationright of the corporation in which the person was adjudged liable to the corporation or in connection with any other proceeding in which the person was adjudged liable for having derived an improper personal liability for monetary damages of directors under certain circumstances (C.R.S. § 7-108-402 (1994)). Ourbenefit. The CBCA further provides that, unless limited by its articles of incorporation, eliminatea corporation shall indemnify a person who was wholly successful, on the personal liabilitymerits or otherwise, in the defense of any proceeding to which the person was a party because the person is or was a director or officer of the corporation, against reasonable expenses incurred by the person in connection with the proceeding. In addition, a director or officer, who is or was a party to a proceeding, may apply for monetary damages of directors under certain circumstances and provide indemnification to ourthe court conducting the proceeding or to another court of competent jurisdiction. The CBCA allows a corporation to indemnify and advance expenses to an officer, employee, fiduciary or agent of the corporation to the same extent as a director. As permitted by the CBCA, the Company’s articles of incorporation and bylaws generally provide that the Company shall indemnify its directors and officers to the fullest extent permitted by the CBCA. In addition, the Company may also indemnify and advance expenses to an officer who is not a director to a greater extent, not inconsistent with public policy, and if provided for by its bylaws, general or specific action of the Company’s board of director or shareholders. The Company has entered into substantively identical Indemnification Agreements with two current director and several former directors and officers (the “Indemnitees”), which generally provide that, to the fullest extent permitted by Colorado Business Corporation Act. Amonglaw, the Company shall indemnify such Indemnitee if the Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the Indemnitee is or was or has agreed to serve at the Company’s request as a director, officer, employee or agent of the Company, or while serving as a director or officer of the Company, is or was serving or has agreed to serve at the Company’s request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other things, these provisions provideenterprise, or by reason of any action alleged to have been taken or omitted in such capacity or by reason of the imposition upon such officer or director of any federal and/or state income tax obligation (inclusive of any interest and penalties, if applicable), that is imposed on such officer or director with respect to income, “phantom income,” rescinded or unconsummated transactions, or any other allegedly taxable event for which no benefit was received by such officer or director. The indemnification obligation includes, without limitation, claims for our officersmonetary damages against an Indemnitee in respect of an alleged breach of fiduciary duties and directors against liabilities forgenerally covers expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and settlements of lawsuits and other proceedings and for the advance and payment of fees and expenses reasonably incurred by an Indemnitee or on an Indemnitee’s behalf in connection with such action, suit or proceeding and any appeal therefrom, but shall only be provided if the Indemnitee acted in good faith; and, in the case of conduct in an official capacity with the corporation, if such conduct was in the Company’s best interests, and, in all other cases, if such conduct was at least not opposed to the Company’s best interests; and, with respect to any criminal action, suit or proceeding, if the Indemnitee had no reasonable cause to believe the Indemnitee’s conduct was unlawful. Section 7-108-402(1) of the CBCA permits a corporation to include in its articles of incorporation a provision eliminating or limiting the personal liability of directors to the corporation or its shareholders for monetary damages for any breach of fiduciary duty as a director (except for breach of a director’s duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, unlawful distributions, or any transaction from which the director derived improper personal benefit). Further, Section 7-108-402(2) of the CBCA provides that no director or officer shall be personally liable for any injury to persons or property arising from a tort committed by an employee, unless the director or officer was either personally involved in defensethe situation giving rise to the litigation or committed a criminal offense in connection with such situation. As permitted by the CBCA, the Company’s articles of incorporation provide that the personal liability of the lawsuitCompany’s directors to the Company or proceeding.its shareholders is limited to the fullest extent permitted by the CBCA. The Indemnification Agreements described above also provide that the Company’s indemnification obligation includes, without limitation, claims for monetary damages against the Indemnitee in respect of an alleged breach of fiduciary duties to the fullest extent permitted by the CBCA. We expect
Section 7-109-108 of the CBCA provides that a corporation may purchase and maintain insurance on behalf of a person who is or was a director, officer, employee, fiduciary or agent of the corporation, or who, while a director, officer, employee, fiduciary or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary or agent of another entity or an employee benefit plan, against liability asserted against or incurred by the person in that capacity or arising from the person’s status as a director, officer, employee, fiduciary or agent, whether or not the corporation would have power to indemnify the person against the same liability under the CBCA. As permitted by the CBCA, the Company’s bylaws authorize the Company to purchase and maintain such insurance. The Company currently maintains a directors and officers insurance policy providing insurance indemnifying our directors and executive officers for certain liabilities. This insurance policy insures ourinsuring its past, present and future directors and officers, with certain exceptions, from claims arising out of any error, misstatement, misleading statement, act, omission, neglect or breach of duty by anywithin the limits and subject to the limitations of the directorspolicy, against expenses in connection with the defense of actions, suits or officers while acting in their capacitiesproceedings, and certain liabilities that might be imposed as such. Claims include claims arising from sales and purchasesa result of our securities and shareholder derivative actions.such actions, suits or proceedings.
Item 15. Recent Sales of Unregistered Securities During November 2007, we granted
All share amounts and the per share consideration received in the following description of recent sales of unregistered securities have been restated to give effect to reverse stock splits affected by the Company on June 2, 2016 and January 25, 2017. | 1. | April 2016 Convertible Notes, Series G Warrants and April 2016 PA Warrants |
On April 1, 2016, the Company issued $10.0 million of 2016 Notes and Series G Warrants to purchase 8,300 shares of Common Stock to institutional and accredited investors in connection with the April 2016 Offering. The 2016 Notes were convertible into shares of Common Stock at a floating conversion price. From September 29, 2016 thorough January 30, 2017 (there were no subsequent conversions), holders converted an aggregate principal amount of $10,000,000 into 596,070 shares of Common Stock at a weighted average exercise price of $16.90 per share and holders converted an aggregate amount of interest of $552,860 into 64,108 shares of Common Stock at a weighted average exercise price of $7.19 per share. On April 1, 2016, in connection with the April 2016 Offering, the Company sold and issued to the former ownersplacement agent, Roth, for an aggregate purchase price of Marin$100, the April 2016 PA Warrant to purchase 1,411 shares of Common Stock pursuant to the terms of the engagement letter between the Company and Roth.
On May 25, 2016 the Company and its wholly-owned subsidiaries RGS Financing, Inc., Real Goods Energy Tech, Inc., Alteris Renewables, Inc., Real Goods Syndicated, Inc., Mercury Energy, Inc., Real Goods Solar, Inc. warrants– Mercury Solar, Elemental Energy, LLC, and Sunetric Management LLC (collectively with the Company, the “Borrower Parties”) entered into a First Loan Modification Agreement effective as of May 19, 2016 (the “Modification Agreement”), with Solar Solutions and Distribution, LLC, a Colorado-based renewable energy solutions company (“Solar Solutions”). The Modification Agreement modified the Amended and Restated Loan Agreement dated March 30, 2016 between the Borrower Parties and Solar Solutions (the “Loan Agreement”) to: (i) reschedule the payment of $167,513.41 from May 15, 2016 to a date on or before June 3, 2016; and (ii) require the Company to issue to Solar Solutions 969 shares of its Common Stock at a price of $172.80 per share as a payment on the revolving line of credit under the Loan Agreement. | 3. | December 2016 PA Warrants |
On December 13, 2016, the Company closed the December 2016 Offering. In connection with the closing, the Company issued to the placement agent, Roth, the December 2016 PA Warrants to purchase 40,00030,834 shares of our ClassCommon Stock, pursuant to the terms of the Placement Agency Agreement between the Company and Roth. | 4. | February 6, 2017 PA Warrants and February 9, 2017 PA Warrants |
On February 6, 2017, the Company closed a registered offering of units. In connection with the closing, the Company issued to the placement agent, Roth, the February 6, 2017 PA Warrant to purchase 185,000 shares of Common Stock, pursuant to the terms of the Placement Agency Agreement between the Company and Roth. On February 9, 2017, the Company closed a registered offering of units. In connection with the closing, the Company issued to the placement agent, Roth, the February 9, 2017 PA Warrant to purchase 120,000 shares of Common Stock, pursuant to the terms of the Placement Agency Agreement between the Company and Roth. | 5. | January 2018 Shares of Common Stock |
On January 2, 2018, the Company entered into a Cooperation Agreement with Iroquois Capital to terminate Iroquois Capitals’ proxy campaign in opposition to the Company’s proposals for the 2017 annual meeting of shareholders. Under the agreement, the Company issued to Iroquois Master Fund LTD and Iroquois Capital Investment Group LLC 456,000 and 144,000 shares of Common Stock, respectively, as reimbursement for expenses incurred in connection with the 2017 annual meeting of shareholders and the negotiation, execution and effectuation of the agreement. | 6. | January 2018 Series O Warrants and January 2018 PA Warrants |
On January 4, 2018, in connection with the January 2018 Offering, the Company issued and sold a Series O Warrant to purchase 1,600,000 shares of Common Stock to one institutional and accredited investor pursuant to the terms of the Securities Purchase Agreement, dated as of January 2, 2018, between the Company and the investor in a private placement in connection with a concurrent registered sales of shares of Common Stock and Series P Warrants to the investor. The investor paid $1.15 per share of Common Stock and $1.14 per share of Common Stock underlying the Series P Warrant for aggregate gross proceeds of approximately $1.8 million. The Company received net proceeds of approximately $1.5 million at the closing, after deducting commissions to the placement agent and estimated offering expenses payable by the Company associated with the January 2018 Offering. On January 4, 2018, in connection with the January 2018 Offering, the Company sold and issued to the placement agent, WestPark, for an aggregate purchase price of $100, the January 2018 PA Warrants to purchase 128,000 shares of Common Stock pursuant to the terms of the engagement letter between the Company and WestPark. | 7. | April 2018 Convertible Notes, Series Q Warrants and April 2018 PA Warrants |
On April 9, 2018, the Company closed the April 2018 Offering. Between April 9, 2018 and July 8, 2018, (i) the holders of the Series A common stockNotes converted (a) an aggregate principal amount of $5,670,500 into 4,500,397 shares of Common Stock, (b) an aggregate Additional Amount (as defined in the Series A Notes) of $7,514,525 into 5,963,958 shares of Common Stock, in each case at a conversion price of $1.26 per share, (ii) the holders of the Series B Notes converted an aggregate principal amount of $600,000 into 476,190 shares of the Common Stock, and (iii) the holders of Series Q Warrants exercised warrants for 7,100,000 shares of Common Stock at an exercise price of $3.20$1.12 per share. Between July 19, 2018 and August 26, 2018, (i) the holders of the Series A Notes converted (a) an aggregate principal amount of $22,700 into 47,341 shares of Common Stock, (b) an aggregate Additional Amount (as defined in the Series A Notes) of $5,868,724 into 8,493,108 shares of Common Stock, (c) an aggregate Original Issue Discount (as defined in the Series A Notes) of $25,943 into 80,493 shares of Common Stock, in each case at a conversion price of $0.3223 per share, pursuant to(ii) the Stock Purchase Agreement by and among Marin Solar, Inc., Roy Phillips, Jan Phillips and Real Goods Marin, Inc. This transaction was not subject to the registration requirementsholders of the Securities Act pursuant to the exemption provided by Section 4(2) thereof, as a transaction bySeries B Notes converted (a) an issuer not involving a public offering. II-1
During January 2008, Gaiam contributed to us our business assets and operations in exchange for 10,000,000aggregate principal amount of $252,956 into 770,992 shares of our Classthe Common Stock, (b) an aggregate Additional True-Up Amount (as defined in the Series B common stock. This transaction was not subject to the registration requirementsNotes) of the Securities Act pursuant to the exemption provided by Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
During January 2008, we granted to Carlson Solar warrants to purchase 30,000$2,661,962 into 7,072,505 shares of our Class A common stockCommon Stock, in each case at a conversion price of $0.3223 per share, and (iii) the holders of Series Q Warrants exercised warrants for 291,667 shares of Common Stock at an exercise price of $3.20$0.3223 per share.
Between August 27, 2018 and April 9, 2019, (i) the holders of the Series A Notes converted (a) an aggregate principal amount of $35,100 into 114,444 shares of Common Stock, (b) an aggregate Additional Amount (as defined in the Series A Notes) of $5,403,364 into 17,617,750 shares of Common Stock, (c) an aggregate Original Issue Discount (as defined in the Series A Notes) of $482,707 into 1,573,873 shares of Common Stock in each case at a conversion price of $0.3067 per share, (ii) the holders of the Series B Notes converted (a) an aggregate principal amount of $4,013,044 into 13,084,591 shares of the Common Stock, (b) an aggregate Additional True-Up Amount (as defined in the Series B Notes) of $4,270,859 into 13,925,315 shares of Common Stock, in each case at a conversion price of $0. 3067 per share, and (iii) the holders of Series Q Warrants exercised warrants for 1,500,000 shares of Common Stock at an exercise price of $0.3223 per share. On April 9, 2018, in connection with the April 2018 Offering, the Company sold and issued to the placement agent, WestPark, for an aggregate purchase price of $100, the April 2018 PA Warrants to purchase 730,159 shares of Common Stock pursuant to the Asset Purchase Agreement among Carlson Solar, Mary Carlson, Scott Carlson, Brittany Carlson, Brandon Carlson and Real Goods Carlson, Inc. This transaction was not subject to the registration requirementsterms of the Securities Act pursuant toengagement letter between the exemption provided by Section 4(2) thereof, as a transaction by an issuer not involving a public offering. We did not pay or give, directly or indirectly, any commission or other remuneration, including underwriting discounts or commissions, in connection with any of the issuances of securities listed above. In addition, each of the warrantCompany and share certificates issued in the transactions listed above bears a restrictive legend permitting the transfer thereof only in compliance with applicable securities laws. The recipients of securities in each of these transactions listed above represented to us their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof. All recipients had adequate access, through their relationship with us or through other access to information provided by us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.WestPark.
| 8. | | Exhibit
No.
| | Description
| 1.1 | | Underwriting Agreement * | | | 3.1 | | Amended and Restated Articles of Incorporation of Real Goods * | | | 3.2 | | Bylaws of Real Goods * | | | 4.1 | | Form of Real Goods Class A Common Stock Certificate * | | | 5.1 | | Opinion of Bartlit Beck Herman Palenchar & Scott LLP * | | | 10.1 | | Real Goods 2008 Long-Term Incentive Plan †* | | | 10.2 | | Stock Purchase Agreement by and among Marin Solar, Inc., Roy Phillips, Jan Phillips and Real Goods Marin, Inc.* | | | 10.3 | | Asset Purchase Agreement among Carlson Solar, Mary Carlson, Scott Carlson, Brittany Carlson, Brandon Carlson and Real Goods Carlson, Inc.* | | | 10.4 | | Registration Rights Agreement * | | | 10.5 | | Intercorporate Services Agreement * | | | 10.6 | | Tax Sharing and Indemnification Agreement * | | | 21.1 | | Subsidiaries of the Registrant | | | 23.1 | | Consent of Bartlit Beck Herman Palenchar & Scott LLP (included in Exhibit 5.1) * | | | 23.2 | | Consent of Ehrhardt Keefe Steiner & Hottman PC | | | 24.1 | | Power of Attorney (included on the signature page to this Registration Statement)April 2019 PA Warrants |
On April 2, 2019, in connection with the Company’s April 2019 Offering, the Company sold and issued to the placement agent, Dawson James., for an aggregate purchase price of $100, the April 2019 PA Warrants to purchase 1,389,474 shares of Common Stock pursuant to the terms of the engagement letter between the Company and Dawson James. * | To be filed by amendment. |
† | Indicates management contract or compensatory plan or arrangement. |
Exemptions from Registration
II-2
(b) Financial Statement Schedules.
All schedules have been omitted because they are not required or are not applicable or the required information is shown in the financial statements or notes thereto.
Item 17. Undertakings
| (1) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinionOfferings numbered above as 1, 6, 7: Each of these offerings was conducted as a private placement exempt from registration under Section 4(a)(2) and Rule 506(b) promulgated by the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
| (2) | The undersigned registrant hereby undertakes that: |
(a) For purposes of determining any liability under the Securities Act of 1933, as amended (the “Securities Act”). The investors were sophisticated and represented in writing that they were accredited investors and acquired the securities for their own accounts for investment purposes. A legend was placed on the securities and will be placed on any stock certificates issued upon the exchange or conversion of securities convertible or exchangeable for the Company’s Common Stock, subject to the terms of the applicable transaction documents, stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without registration or an exemption therefrom.
Offerings numbered above as 1, 2, 3, 4, 5, 6, 7, 8: Each of these offerings was conducted as a private placement exempt from registration under Section 4(a)(2) of the Securities Act because the Company consummated the transactions with parties with which the Company had a pre-existing, long-standing and substantive relationship, who were sophisticated and accredited investor. A legend was placed on the securities and will be placed on any stock certificates issued upon the exchange or conversion of securities convertible or exchangeable for the Company’s Common Stock, subject to the terms of the applicable transaction documents, stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without registration or an exemption therefrom. Item 16. Exhibits and Financial Statements The exhibits to this registration statement are listed in the exhibit index attached immediately before the signature pages. Item 17. Undertakings The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information omittedset forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed bywith the registrantSEC pursuant to Rule 424(b)(1) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or (4) or 497(h) underany material change to such information in the Securities Act shall be deemedregistration statement;provided, however, that paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply if the information required to be partincluded in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act, that are incorporated by reference in this registration statement as of the time it was declared effective.statement. (b) For
(2) That, for the purpose of determining any liability under the Securities Act, of 1933, each such post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness.Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. (5) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. (6) That, for purposes of determining any liability under the Securities Act, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Exchange Act that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (7) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the indemnification provisions described herein, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. EXHIBITS INDEX | Exhibit No. | (3) | The undersigned hereby undertakesDescription | | | | | 3.1 | | Articles of Incorporation of Real Goods Solar, Inc. (Incorporated by reference to provideExhibit 3.1 to Real Goods Solar’s Quarterly Report on Form 10-Q filed November 8, 2016 (Commission File No. 001-34044)). | | | | | 3.2 | | Certificate of Designation of Preferences, Rights and Limitations of Series A 12.5% Mandatorily Convertible Preferred Stock (Incorporated by reference to Exhibit 3.2 to Real Goods Solar’s Quarterly Report on Form 10-Q filed November 8, 2016 (Commission File No. 001-34044)). | | | | | 3.3 | | Statement of Correction to Articles of Incorporation of Real Goods Solar, Inc. (Incorporated by reference to Exhibit 3.3 to Real Goods Solar, Inc.’s Quarterly Report on Form 10-Q filed May 10, 2017 (Commission File No. 001-34044)). | | | | | 3.4 | | Articles of Incorporation of Real Goods Solar, Inc., revised to reflect correction made by Statement of Correction to Articles of Incorporation (previously filed). | | | | | 3.5 | | Bylaws of Real Goods Solar, Inc. (Incorporated by reference to Exhibit 3.2 to Real Goods Solar’s Amendment No. 1 to Registration Statement on Form S-1 filed March 28, 2008 (Commission File No. 333-149092)). | | | | | 4.1 | | Form of Real Goods Solar Class A Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Amendment No. 5 to Registration Statement on Form S-1 filed May 2, 2008 (Commission File No. 333-149092)). | | | | | 4.2 | | Warrant, dated March 26, 2013, pursuant to the underwriters atSecond Loan Modification and Reinstatement Agreement, dated November 13, 2012, among Silicon Valley Bank, Real Goods Energy Tech, Inc., Real Goods Trading Corporation, Earth Friendly Energy Group Holdings, LLC, Alteris Renewables, Inc., Earth Friendly Energy Group, LLC, Solar Works, LLC, Alteris RPS, LLC, and Alteris ISI, LLC (Incorporated by reference to Exhibit 10.21 to Real Goods Solar’s Annual Report on Form 10-K filed April 1, 2013 (Commission File No. 001-34044)). | | | | | 4.3 | | Warrant, dated March 27, 2013, issued to Silicon Valley Bank pursuant to the closing specifiedThird Loan Modification Agreement, dated March 27, 2013, among Silicon Valley Bank, Real Goods Energy Tech, Inc., Real Goods Trading Corporation, and Alteris Renewables, Inc. (Incorporated by reference to Exhibit 10.22 to Real Goods Solar’s Annual Report on Form 10-K filed April 1, 2013 (Commission File No. 001-34044)). | | | | | 4.4 | | Form of Warrant, dated June 3, 2013, issued to the investors under the Securities Purchase Agreement, dated May 24, 2013, among Real Goods Solar, Inc. and the investors identified therein (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed June 3, 2013 (Commission File No. 001-34044)). | | | | | 4.5 | | Form of Warrant, dated November 20, 2013, issued pursuant to the Underwriting Agreement, dated November 15, 2013 by and between the Company and Cowen and Company (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed November 21, 2013 (Commission File No. 001-34044)). | | | | | 4.6 | | Form of Warrant, dated July 9, 2014, issued to the investors under the Securities Purchase Agreement, dated July 2, 2014, among Real Goods Solar, Inc. and the investors identified therein (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed July 3, 2014 (Commission File No. 001-34044)). | | | | | 4.7 | | Warrant, dated June 6, 2014, issued to Silicon Valley Bank pursuant to the Joinder and Sixth Loan Modification Agreement, dated June 6, 2014, among Real Goods Energy Tech, Inc., Real Goods Trading Corporation, Alteris Renewables, Inc., Real Goods Syndicated, Inc., Mercury Energy, Inc., Real Goods Solar, Inc. - Mercury Solar, Elemental Energy, LLC, Sunetric Management LLC and Silicon Valley Bank (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Quarterly Report on Form 10-Q filed August 19, 2014 (Commission File No. 001-34044)). |
| Exhibit No. | | Description | | | | | 4.8 | | Warrant, dated November 19, 2014, issued to Silicon Valley Bank pursuant to the Seventh Loan Modification Agreement, dated November 19, 2014, among Real Goods Energy Tech, Inc., Real Goods Trading Corporation, Alteris Renewables, Inc., Real Goods Syndicated, Inc., Mercury Energy, Inc., Real Goods Solar, Inc. - Mercury Solar, Elemental Energy, LLC, Sunetric Management LLC and Silicon Valley Bank (Incorporated by reference to Exhibit 4.8 to Real Goods Solar’s Annual Report on Form 10-K filed March 31, 2015 (Commission File No. 001-34044)). | | | | | 4.9 | | Combined Form of Warrant issued to investors on February 26 and 27, 2015 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed February 24, 2015 (Commission File No. 001-34044)). | | | | | 4.10 | | Warrant to Purchase Common Stock dated February 27, 2015, issued to WestPark Capital, Inc. (Incorporated by reference to Exhibit 4.2 to Real Goods Solar’s Quarterly Report on Form 10-Q filed May 11, 2015 (Commission File No. 001-34044)). | | | | | 4.11 | | Waiver and Amendment Agreement, dated March 31, 2015, among Real Goods Solar, Inc. and the investor party thereto (Incorporated by reference to Exhibit 4.3 to Real Goods Solar’s Quarterly Report on Form 10-Q filed May 11, 2015 (Commission File No. 001-34044)). | | | | | 4.12 | | Form of Series F Warrant issued to investors on June 30 and July 1, 2015 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed June 26, 2015 (Commission File No. 001-34044)). | | | | | 4.13 | | Form of Warrant to Purchase Common Stock, dated June 30, 2015, issued to WestPark Capital, Inc. (Incorporated by reference to Exhibit 4.3 to Real Goods Solar’s Quarterly Report on Form 10-Q filed August 10, 2015 (Commission File No. 001-34044)). | | | | | 4.14 | | Form of Senior Secured Convertible Note issued to the investors under the Securities Purchase Agreement, dated April 1, 2016 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed April 1, 2016 (Commission File No. 001-34044)). | | | | | 4.15 | | Form of Series G Warrants issued to the investors under the Securities Purchase Agreement, dated April 1, 2016 (Incorporated by reference to Exhibit 4.2 to Real Goods Solar’s Current Report on Form 8-K filed April 1, 2016 (Commission File No. 001-34044)). | | | | | 4.16 | | Placement Agent Warrant, dated as of April 1, 2016, issued to Roth Capital Partners, LLC. (previously filed). | | | | | 4.17 | | Form of Termination and Amendment Agreement, dated May 12, 2016, between Real Goods Solar, Inc. and each of the investors party to the Securities Purchase Agreement, dated April 1, 2016 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Quarterly Report on Form 10-Q filed May 12, 2016 (Commission File No. 001-34044)). | | | | | 4.18 | | Form of Series H Warrant, dated September 14, 2016, issued to investors participating in the underwriting agreements, certificatesSeptember 14, 2016 public unit offering (Incorporated by reference to Exhibit 4.17 to Amendment No. 5 to Real Goods Solar’s Registration Statement on Form S-1 filed September 7, 2016 (Commission File No. 333-211915)). | | | | | 4.19 | | Form of Real Goods Solar Series A 12.5% Mandatorily Convertible Preferred Stock Certificate (Incorporated by reference to Exhibit 4.18 to Amendment No. 3 to Real Goods Solar’s Registration Statement on Form S-1 filed August 25, 2016 (Commission File No. 333-211915)). | | | | | 4.20 | | Representative Warrant to Purchase Units Consisting of Series A 12.5% Mandatorily Convertible Preferred Stock and Series H Warrant to Purchase Common Stock, dated September 14, 2016, issued to Roth Capital Partners, LLC (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed September 14, 2016 (Commission File No. 001-34044)). |
| Exhibit No. | | Description | | | | | 4.21 | | Form of Series I Warrant, dated December 8, 2016, issued to investors party the Securities Purchase Agreement, dated December 8, 2016 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed December 13, 2016 (Commission File No. 001-34044)). | | | | | 4.22 | | Form of Series J Warrant, dated December 8, 2016, issued to investors party the Securities Purchase Agreement, dated December 8, 2016 (Incorporated by reference to Exhibit 4.2 to Real Goods Solar’s Current Report on Form 8-K filed December 13, 2016 (Commission File No. 001-34044)). | | | | | 4.23 | | Placement Agent Warrant, dated December 13, 2016, issued to Roth Capital Partners, LLC (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed December 14, 2016 (Commission File No. 001-34044)). | | | | | 4.24 | | Form of Series K Warrant, dated February 6, 2017, issued to investors party to the Securities Purchase Agreement, dated February 1, 2017 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed February 2, 2017 (Commission File No. 001-34044)). | | | | | 4.25 | | Form of Series L Warrant, dated February 6, 2017, issued to investors party to the Securities Purchase Agreement, dated February 1, 2017 (Incorporated by reference to Exhibit 4.2 to Real Goods Solar’s Current Report on Form 8-K filed February 2, 2017 (Commission File No. 001-34044)). | | | | | 4.26 | | Placement Agency Warrant, dated February 6, 2017, issued to Roth Capital Partners, LLC (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed February 6, 2017 (Commission File No. 001-34044)). | | | | | 4.27 | | Form of Series M Warrant, dated February 9, 2017, issued to investors party to the Securities Purchase Agreement, dated February 7, 2017 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Amendment No. 1 Current Report on Form 8-K/A filed February 15, 2017 (Commission File No. 001-34044)). | | | | | 4.28 | | Form of Series N Warrant, dated February 9, 2017, issued to investors party to the Securities Purchase Agreement, dated February 7, 2017 (Incorporated by reference to Exhibit 4.2 to Real Goods Solar’s Amendment No. 1 Current Report on Form 8-K/A filed February 15, 2017 (Commission File No. 001-34044)). | | | | | 4.29 | | Placement Agency Warrant, dated February 9, 2017, issued to Roth Capital Partners, LLC (Incorporated by reference to Exhibit 4.3 to Real Goods Solar’s Amendment No. 1 Current Report on Form 8-K/A filed February 15, 2017 (Commission File No. 001-34044)). | | | | | 4.30 | | Form of Series O Warrant, dated January 4, 2018, issued to the investor party to the Securities Purchase Agreement, dated January 2, 2018 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed January 2, 2018 (Commission File No. 001-34044)). | | | | | 4.31 | | Form of Series P Warrant, dated January 4, 2018, issued to the investor party to the Securities Purchase Agreement, dated January 2, 2018 (Incorporated by reference to Exhibit 4.2 to Real Goods Solar’s Current Report on Form 8-K filed January 2, 2018 (Commission File No. 001-34044)). | | | | | 4.32 | | Placement Agency Warrant, dated January 4, 2018, issued to Westpark Capital, LLC (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed January 4, 2018 (Commission File No. 001-34044)). | | | | | 4.33 | | Form of Series A Senior Convertible Note, dated April 9, 2018, issued to the investors under the Securities Purchase Agreement, dated March 30, 2018 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). |
| Exhibit No. | | Description | | | | | 4.34 | | Form of Series B Senior Secured Convertible Note, dated April 9, 2018, issued to the investors under the Securities Purchase Agreement, dated March 30, 2018 (Incorporated by reference to Exhibit 4.2 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). | | | | | 4.35 | | Form of Series Q Warrants, dated April 9, 2018, issued to the investors under the Securities Purchase Agreement, dated March 30, 2018 (Incorporated by reference to Exhibit 4.3 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). | | | | | 4.36 | | Form of Secured Promissory Notes, dated April 9, 2018, issued to Real Goods Solar, Inc. under the Note Purchase Agreement, dated April 9, 2018 by each of the investors under the Securities Purchase Agreement, dated March 30, 2018 (Incorporated by reference to Exhibit 4.4 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). | | | | | 4.37 | | Form of Placement Agent Warrant, dated April 9, 2018, issued by Real Goods Solar, Inc. to WestPark Capital, Inc. (Incorporated by reference to Exhibit 4.5 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). | | | | | 4.38 | | Form of Series R Warrant, dated April 2, 2019, issued to the investors under the Securities Purchase Agreement, dated April 2, 2019 (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed April 2, 2019 (Commission File No. 001-34044)). | | | | | 4.39 | | Form of Series S Warrant, dated April 2, 2019, issued to the investors under the Securities Purchase Agreement, dated April 2, 2019 (Incorporated by reference to Exhibit 4.2 to Real Goods Solar’s Current Report on Form 8-K filed April 2, 2019 (Commission File No. 001-34044)). | | | | | 4.40 | | Form of Placement Agent Warrant, dated as of April 4, 2019, issued to Dawson James Securities, Inc. (Incorporated by reference to Exhibit 4.1 to Real Goods Solar’s Current Report on Form 8-K filed April 4, 2019 (Commission File No. 001-34044)). | | | | | 5.1† | | Opinion of Brownstein Hyatt Farber Schreck LLP | | | | | 10.1* | | Form of Real Goods Solar, Inc. Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Amendment No. 1 to Registration Statement on Form S-1 filed March 28, 2008 (Commission File No. 333-149092)). | | | | | 10.2* | | Amended and Restated Real Goods Solar, Inc. 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed February 12, 2018 (Commission File No. 001-34044)). | | | | | 10.3 | | Tax Sharing and Indemnification Agreement between Real Goods Solar, Inc. and Gaiam, Inc. (Incorporated by reference to Exhibit 10.7 to Real Goods Solar’s Amendment No. 3 to Registration Statement on Form S-1 filed April 17, 2008 (Commission File No. 333-149092)). | | | | | 10.4 | | Shareholders Agreement, dated December 19, 2011, between Real Goods Solar, Inc. and Riverside Renewable Energy Investments, LLC (Incorporated by reference to Exhibit 10.4 to Real Goods Solar’s Current Report on Form 8-K filed December 21, 2011 (Commission File No. 001-34044)). | | | | | 10.5 | | First Amendment to Tax Sharing Agreement, dated December 19, 2011, between Real Goods Solar, Inc. and Gaiam, Inc. (Incorporated by reference to Exhibit 10.17 to Real Goods Solar’s Annual Report on Form 10-K filed April 1, 2013 (Commission File No. 001-34044)). |
| Exhibit No. | | Description | | | | | 10.6 | | Securities Purchase Agreement, dated May 24, 2013, among Real Goods Solar, Inc. and the investors thereunder (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed May 24, 2013 (Commission File No. 001-34044)). | | | | | 10.7 | | Securities Purchase Agreement, dated July 2, 2014, among Real Goods Solar, Inc. and the investors thereunder (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed July 3, 2014 (Commission File No. 001-34044)). | | | | | 10.8 | | Form of Registration Rights Agreement, dated July 9, 2014, among Real Goods Solar, Inc. and the investors under the Securities Purchase Agreement, dated July 2, 2014, among Real Goods Solar, Inc. and such investors (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed July 3, 2014 (Commission File No. 001-34044)). | | | | | 10.9 | | Placement Agency Agreement, dated February 23, 2015, between Real Goods Solar, Inc. and WestPark Capital, Inc. (Incorporated by reference to Exhibit 1.1 to Real Goods Solar’s Current Report on Form 8-K filed February 24, 2015 (Commission File No. 001-34044)). | | | | | 10.10 | | Form of Securities Purchase Agreement, dated February 23, 2015, among Real Goods Solar, Inc. and the investors thereunder (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed February 24, 2015 (Commission File No. 001-34044)). | | | | | 10.11* | | Employment Agreement, dated June 1, 2015, between Real Goods Solar, Inc. and Dennis Lacey (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed June 3, 2015 (Commission File No. 001-34044)). | | | | | 10.12* | | Form of Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed June 3, 2015 (Commission File No. 001-34044)). | | | | | 10.13 | | Placement Agency Agreement, dated June 25, 2015, between Real Goods Solar, Inc. and WestPark Capital, Inc. (Incorporated by reference to Exhibit 1.1 to Real Goods Solar’s Current Report on Form 8-K filed June 26, 2015 (Commission File No. 001-34044)). | | | | | 10.14 | | Form of Securities Purchase Agreement, dated June 25, 2015, among Real Goods Solar, Inc. and the investors party thereto (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed June 26, 2015 (Commission File No. 001-34044)). | | | | | 10.15 | | Securities Purchase Agreement, dated April 1, 2016, among Real Goods Solar, Inc. and the investors party thereto (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed April 1, 2016 (Commission File No. 001-34044)). | | | | | 10.16 | | Registration Rights Agreement, dated April 1, 2016, among Real Goods Solar, Inc. and the investors party thereto (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed April 1, 2016 (Commission File No. 001-34044)). | | | | | 10.17 | | Placement Agency Agreement, dated December 8, 2016, among Real Goods Solar, Inc., Roth Capital Partners, LLC and WestPark Capital, Inc. (Incorporated by reference to Exhibit 1.1 to Real Goods Solar’s Current Report on Form 8-K filed December 13, 2016 (Commission File No. 001-34044)). | | | | | 10.18 | | Form of Securities Purchase Agreement, dated December 8, 2016, among Real Goods Solar, Inc. and the purchasers party thereto (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed December 13, 2016 (Commission File No. 001-34044)). |
| Exhibit No. | | Description | | | | | 10.19 | | Form of Leak-Out Agreement, dated December 8, 2016, entered into by $10,000 or greater investors party to the Securities Purchase Agreement, dated December 8, 2016 (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed December 13, 2016 (Commission File No. 001-34044)). | | | | | 10.20 | | Form of Amendment to Securities Purchase Agreement, dated December 12, 2016, among Real Goods Solar, Inc. and the purchasers party thereto (Incorporated by reference to Exhibit 10.3 to Real Goods Solar’s Current Report on Form 8-K filed December 13, 2016 (Commission File No. 001-34044)). | | | | | 10.21 | | Placement Agency Agreement, dated February 1, 2017, between Real Goods Solar, Inc. and Roth Capital Partners, LLC (Incorporated by reference to Exhibit 1.1 to Real Goods Solar’s Current Report on Form 8-K filed February 2, 2017 (Commission File No. 001-34044)). | | | | | 10.22 | | Form of Securities Purchase Agreement, dated February 1, 2017, among Real Goods Solar, Inc. and the purchasers party thereto (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed February 2, 2017 (Commission File No. 001-34044)). | | | | | 10.23 | | Form of Leak-Out Agreement, dated February 1, 2017, among Real Goods Solar, Inc. and certain purchasers party to the Securities Purchase Agreement, dated February 1, 2017 (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed February 2, 2017 (Commission File No. 001-34044)). | | | | | 10.24 | | Placement Agency Agreement, dated February 7, 2017, between Real Goods Solar, Inc. and Roth Capital Partners, LLC (Incorporated by reference to Exhibit 1.1 to Real Goods Solar’s Current Report on Form 8-K filed February 8, 2017 (Commission File No. 001-34044)). | | | | | 10.25 | | Form of Securities Purchase Agreement, dated February 7, 2017, among Real Goods Solar, Inc. and the purchasers party thereto (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Amendment No. 1 Current Report on Form 8-K/A filed February 15, 2017 (Commission File No. 001-34044)). | | | | | 10.26 | | Form of Leak-Out Agreement, dated February 7, 2017, among Real Goods Solar, Inc. and certain purchasers party to the Securities Purchase Agreement, dated February 7, 2017 (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed February 8, 2017 (Commission File No. 001-34044)). | | | | | 10.27 | | Master Services Agreement, dated May 23, 2017, between Real Goods Solar, Inc. and Mobomo, LLC (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Quarterly Report on Form 10-Q filed August 14, 2017 (Commission File No. 001-34044)). | | | | | 10.28 | | Statement of Work, dated May 24, 2017, between Real Goods Solar, Inc. and Mobomo, LLC (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Quarterly Report on Form 10-Q filed August 14, 2017 (Commission File No. 001-34044)). | | | | | 10.29 | | Technology License Agreement, dated September 29, 2017, by and between Real Goods Solar, Inc. and Dow Global Technologies LLC (Incorporated by reference to Exhibit 10.1 to Real Goods Solar, Inc.’s Current Report on Form 8-K filed October 4, 2017 (Commission File No. 001-34044)). | | | | | 10.30 | | Engagement Agreement, dated December 13, 2017, among Real Goods Solar, Inc. and WestPark Capital, Inc. (Incorporated by reference to Exhibit 1.1 to Real Goods Solar, Inc.’s Current Report on Form 8-K filed January 2, 2018 (Commission File No. 001-34044)). |
| Exhibit No. | | Description | | | | | 10.31 | | Form of Securities Purchase Agreement, dated January 2, 2018, between Real Goods Solar, Inc. and the purchaser party thereto (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed January 2, 2018 (Commission File No. 001-34044)). | | | | | 10.32 | | Cooperation Agreement dated January 2, 2018, between Real Goods Solar, Inc. and Iroquois Capital Management LLC, Iroquois Master Fund LTD, Iroquois Capital Investment Group LLC, Richard Abbe and Kimberly Page (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed January 3, 2018 (Commission File No. 001-34044)). | | | | | 10.33* | | Amended and Restated Real Goods Solar, Inc. 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed February 12, 2018 (Commission File No. 001-34044)). | | | | | 10.34 | | Placement Agency Agreement, dated January 29, 2018, between Real Goods Solar, Inc. and WestPark Capital, Inc. (Incorporated by reference to Exhibit 1.1 to Real Goods Solar’s Quarterly Report on Form 10-Q filed August 14, 2018 (Commission File No. 001-34044)). | | | | | 10.35 | | Securities Purchase Agreement, dated March 30, 2018, among Real Goods Solar, Inc. and the investor parties thereto (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed April 2, 2018 (Commission File No. 001-34044)). | | | | | 10.36 | | Form of Amendment No. 1 to Securities Purchase Agreement, dated April 9, 2018, between Real Goods Solar, Inc. and each of the investors under the Securities Purchase Agreement, dated March 30, 2018 (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). | | | | | 10.37 | | Registration Rights Agreement, dated April 9, 2018, among Real Goods Solar, Inc. and the investors under the Securities Purchase Agreement, dated March 30, 2018 (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). | | | | | 10.38 | | Form of Note Purchase Agreement, dated April 9, 2018, between Real Goods Solar, Inc. and each of the investors under the Securities Purchase Agreement, dated March 30, 2018 (Incorporated by reference to Exhibit 10.3 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). | | | | | 10.39 | | Form of Master Netting Agreement, dated April 9, 2018, between Real Goods Solar, Inc. and each of the investors under the Securities Purchase Agreement, dated March 30, 2018 (Incorporated by reference to Exhibit 10.4 to Real Goods Solar’s Current Report on Form 8-K filed April 10, 2018 (Commission File No. 001-34044)). | | | | | 10.40 | | Registration Rights Agreement, dated June 5, 2018, among Real Goods Solar, Inc., Iroquois Master Fund Ltd. and Iroquois Capital Investment Group LLC (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed June 7, 2018 (Commission File No. 001-34044)). | | | | | 10.41* | | Real Goods Solar, Inc. 2018 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed June 21, 2018 (Commission File No. 001-34044)). | | | | | 10.42* | | Form of Real Goods Solar, Inc. Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed June 21, 2018 (Commission File No. 001-34044)). | | | | | 10.43 | | Form of Letter Agreement, dated August 29, 2018, between Real Goods Solar, Inc. and each holder of Series A Senior Convertible Notes and Series B Senior Secured Convertible Notes, in such denominations and registered in such names as requiredeach case due April 9, 2019 (Incorporated by the underwritersreference to permit prompt deliveryExhibit 10.1 to each purchaser.Real Goods Solar’s Current Report on Form 8-K filed August 29, 2018 (Commission File No. 001-34044)). |
| Exhibit No. | | Description | | | | | 10.44* | | Form of Change in Control Agreement entered into on November 14, 2018 between Real Goods Solar, Inc. and each of, among others, Alan Fine and Nicolle Dorsey (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed November 20, 2018 (Commission File No. 001-34044)). | | | | | 10.45* | | Amendment to Employment Agreement, dated November 19, 2018, between Real Goods Solar, Inc. and Dennis Lacey (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed November 20, 2018 (Commission File No. 001-34044)). | | | | | 10.46* | | Real Goods Solar, Inc. 2019 Incentive Compensation Plan (Incorporated by reference to Exhibit 10.3 to Real Goods Solar’s Current Report on Form 8-K filed November 20, 2018 (Commission File No. 001-34044)). | | | | | 10.47* | | Real Goods Solar, Inc. 2019 One-Time Special Discretionary Bonus Plan (Incorporated by reference to Exhibit 10.4 to Real Goods Solar’s Current Report on Form 8-K filed November 20, 2018 (Commission File No. 001-34044)). | | | | | 10.48 | | Engagement Letter, dated March 19, 2019, among Real Goods Solar, Inc. and Dawson James Securities, Inc. (Incorporated by reference to Exhibit 1.1 to Real Goods Solar’s Current Report on Form 8-K filed April 2, 2019 (Commission File No. 001-34044)). | | | | | 10.49 | | Form of Securities Purchase Agreement, dated April 2, 2019, among Real Goods Solar, Inc. and the purchasers party thereto (Incorporated by reference to Exhibit 10.1 to Real Goods Solar’s Current Report on Form 8-K filed April 2, 2019 (Commission File No. 001-34044)). | | | | | 10.50 | | Form of Leak-Out Agreement (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Current Report on Form 8-K filed April 2, 2019 (Commission File No. 001-34044)). | | | | | 10.51 | | Form of Indemnification Agreement and schedule of directors and officers who have entered into such agreement (Incorporated by reference to Exhibit 10.2 to Real Goods Solar’s Quarterly Report on Form 10-Q filed November 14, 2012 (Commission File No. 001-34044)). | | | | | 21.1 | | Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21.1 to Real Goods Solar’s Annual Report on Form 10-K filed April 2, 2018 (Commission File No. 001-34044)) | | | | | 23.1† | | Consent of Brownstein Hyatt Farber Schreck, LLP (included in Exhibit 5.1) | | | | | 23.2 | | Consent of BDO USA, LLP (previously filed) | | | | | 23.3 | | Consent of Moss Adams LLP (previously filed) | | | | | 24.1 | | Power of Attorney (previously filed) | | | | | 101.INS | | XBRL Instance Document (previously filed) | | | | | 101.SCH | | XBRL Taxonomy Extension Schema (previously filed) | | | | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase (previously filed) | | | | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase (previously filed) | | | | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase (previously filed) | | | | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase (previously filed) |
* Indicates management contract or compensatory plan or arrangement. Signatures† Filed herewith
SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Broomfield,Denver, State of Colorado, on FebruaryMay 1, 2008.2019. | | Real Goods Solar, Inc. | REAL GOODS SOLAR, INC. | | | /s/ Dennis Lacey | | By: Dennis Lacey | | | /s/ JIRKA RYSAVY
Chief Executive Officer and Director | | | Jirka Rysavy, | | | Chairman(Principal Executive Officer) |
Power of attorney
In accordance with the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates stated. EachKNOW ALL PEOPLE BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jirka RysavyDennis Lacey and Vilia ValentineAlan Fine, and each of them severally, as his or her true and lawful attorney-in-factattorneys-in-fact and agent,agents, each acting alongalone with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including pre-effective and post-effective amendments) and exhibits to the registration statementthis Registration Statement on Form S-1, and to any registration statement relating to the same offering of securities that are filed under SECpursuant to Rule 462 of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the SEC, granting unto said attorney-in-factattorneys-in-fact and agent,agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises,connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-factattorneys-in-fact and agent,agents, or hisany of them, or hertheirs or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. | | | | | Signature | | Title | | Date | | | | /S/ JIRKA RYSAVY
| | Jirka Rysavy, Chairman | | February 1, 2008 | | | | /S/ JOHN SCHAEFFER
* | | John Schaeffer,Ian Bowles, Chairman of the Company’s Board of Directors | | May 1, 2019 | | | | | | | /s/ Dennis Lacey | | Dennis Lacey, Chief Executive Officer and Director (Principal Executive Officer) | | FebruaryMay 1, 20082019 | | | | /S/ VILIA VALENTINE
| | Vilia Valentine, | | | | /s/ Alan Fine | | Alan Fine, Chief Financial Officer (Principal Financial and Accounting Officer)Treasurer | | February 6, 2008May 1, 2019 | | | | /S/ JAMES ARGYROPOULOS
| | James Argyropoulos, | | | | /s/ Nicolle Dorsey | | Nicolle Dorsey, Principal Accounting Officer and Controller | | May 1, 2019 | | | | | | | * | | Pavel Bouska, Director | | January 31, 2008May 1, 2019 | | | | /S/ BARBARA MOWRY
| | Barbara Mowry, | | | | * | | Robert L. Scott, Director | | FebruaryMay 1, 2008 | | | | /S/ TED NARK
| | Ted Nark, Director | | February 1, 20082019 |
II-4
*By:/s/ Dennis Lacey Index to exhibits
| | | Exhibit
No.
| | Description
| 1.1 | | Underwriting Agreement * | | | 3.1 | | Amended and Restated Articles of Incorporation of Real Goods * | | | 3.2 | | Bylaws of Real Goods * | | | 4.1 | | Form of Real Goods Class A Common Stock Certificate * | | | 5.1 | | Opinion of Bartlit Beck Herman Palenchar & Scott LLP * | | | 10.1 | | Real Goods 2008 Long-Term Incentive Plan †* | | | 10.2 | | Stock Purchase Agreement by and among Marin Solar, Inc., Roy Phillips, Jan Phillips and Real Goods Marin, Inc.* | | | 10.3 | | Asset Purchase Agreement among Carlson Solar, Mary Carlson, Scott Carlson, Brittany Carlson, Brandon Carlson and Real Goods Carlson, Inc.* | | | 10.4 | | Registration Rights Agreement * | | | 10.5 | | Intercorporate Services Agreement * | | | 10.6 | | Tax Sharing and Indemnification Agreement* | | | 21.1 | | Subsidiaries of the Registrant | | | 23.1 | | Consent of Bartlit Beck Herman Palenchar & Scott LLP (included in Exhibit 5.1) * | | | 23.2 | | Consent of Ehrhardt Keefe Steiner & Hottman PC | | | 24.1 | | Power of Attorney (included on the signature page to this Registration Statement) |
Dennis Lacey, Attorney-in-Fact * | To be filed by amendment.II-15 |
† | Indicates management contract or compensatory plan or arrangement. |
II-5
|
