Item 7.
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Managements discussion and analysis of financial condition and results of operations
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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 contains statements of a forward-looking nature relating to future events or our future financial performance. These statements involve known and unknown risks, uncertainties
and other factors that may cause actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking
statements, including those set forth in this Form 10-K.
Overview
We are a leading provider of turnkey commercial and residential solar energy solutions, with more than 19,000 solar systems in place. We also have more than 35
years of experience in solar energy, beginning with the sale in 1978 of the first solar PV panels in the United States. With 16 offices across the West, Midwest and the Northeast, we are one of the larger solar energy installers in the U.S. in the
residential and commercial sectors. However, there are market participants, especially in the utility-size solar systems, who are much larger than us.
Our revenue primarily results from the installation of solar energy systems. We also derive a portion of our revenue from the retail sale of renewable energy
products. Our expenses primarily consist of labor costs, costs of solar modules, invertors, balance of systems and other direct costs associated with solar system installation, and related sales and marketing and general and administrative costs.
We continue to expect strong demand for both residential and commercial solar installations, despite the overall economic weakness in the United States.
As one of the few solar installers with a relatively strong national footprint, we expect to capitalize on our market position and the expanding U.S. solar industry.
Mergers and Acquisitions
Earth Friendly Energy Group
Holdings, LLC d/b/a Alteris Renewables
We obtained financial control, through an Agreement and Plan of Merger, of 100% of the voting equity interests
of Earth Friendly Energy Group Holdings, LLC d/b/a Alteris Renewables (Alteris) on June 21, 2011. The total consideration transferred was approximately $21.7 million and was comprised of 8.7 million shares of our Class A
common stock, valued at $21.6 million based on our Class A common stock closing market price of $2.48 per share on June 21, 2011, and $0.1 million worth of replacement share-based payment awards attributable to services rendered prior to
the acquisition date.
Syndicated Solar, Inc.
We
purchased certain assets and assumed certain current liabilities of Syndicated Solar, Inc. (Syndicated) through an Asset Purchase Agreement on August 9, 2013. The total consideration transferred was approximately $2.4 million and
was comprised of 400,000 shares of our Class A common stock, valued at $916,000 based on our Class A common stock closing market price of $2.29 per share on August 9, 2013, approximately, $1.2 million of liabilities assumed in excess
of assets acquired and cash of $250,000. In addition the fair value of liabilities assumed exceeded the fair value of assets acquired by $1.2 million.
Mercury Energy, Inc.
We acquired 100% of the voting
equity interests of Mercury Energy, Inc. on January 14, 2014 through a merger pursuant to an Agreement and Plan of Merger. The total consideration transferred was approximately $32.0 million and was comprised of 8.3 million shares of our
Class A common stock, based on our Class A common stock closing market price of $3.83 per share on January 13, 2014, subject to an escrow arrangement and a post-closing working capital adjustment.
Elemental Energy, LLC d/b/a Sunetric.
We entered into a
definitive agreement to obtain financial control, through a Membership Interest Purchase Agreement (Purchase Agreement), of 100% of the membership interests of Elemental Energy, LLC d/b/a Sunetric on March 26, 2014. For further
details about the acquisition, see Item 9B in this Form 10-K.
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
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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
Revenue consists primarily of solar energy system installation fees. We recognize revenue from fixed price contracts using either the completed contract or
percentage-of-completion method, based on the size of the energy system installation. We recognize revenue for fixed price contracts from energy system installations of less than 100 kilowatts, or kW, when the installation is substantially complete,
while we recognize revenue from energy system installations equal to or greater than 100 kW on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to total estimated costs for each contract. The
percentage-of-completion method involves estimates of progress. We believe the best indicator of progress toward completion of the project is costs incurred to date as a percentage of estimated actual costs.
Allowances for Doubtful Accounts
We maintain allowances
for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make estimates of the collectability of our accounts receivable by analyzing historical bad debts, specific customer
creditworthiness, and current economic trends. 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 consists primarily of solar energy
system components (such as solar panels and inverters) located in various warehouse facilities and finished goods held for sale at our Solar Living Center located in Hopland, California. We state our inventory at the lower of cost (first-in,
first-out method) or market. We identify the inventory items to be written down for obsolescence based on the items 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.
Goodwill
Goodwill represents the excess of the purchase consideration over the estimated fair value of assets acquired less liabilities assumed in a business
acquisition. Goodwill is reviewed for impairment annually or more frequently if impairment indicators arise. Since we operate in only one business segment, we assess impairment at the Company level. We have the option of first assessing qualitative
factors to determine whether events and circumstances indicate that it is more likely than not that the fair value of the Company is less than its carrying amount. If it is determined that the fair value of the Company is more likely than not
greater than its carrying amount, then the two-step impairment test is unnecessary. If it is determined that the two-step impairment test is necessary, then for step one, we compare the estimated fair value of the Company with its carrying amount,
including goodwill. If the estimated fair value of the Company exceeds its carrying amount, we consider the Companys goodwill not impaired. If the carrying amount of the Company exceeds its estimated fair value, we perform the second step of
the goodwill impairment test to measure the amount of impairment loss. We use either a comparable market approach, traditional present value method, or some combination thereof to test for potential impairment. The use of present value techniques
requires us to make estimates and judgments about our future cash flows. These cash flow forecasts will be based on assumptions that are consistent with the plans and estimates we use to manage our business. The 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.
Purchase Accounting
We account for the acquisition of a
controlling interest 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,
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.
Share-Based Compensation
We recognize compensation cost
for share-based awards based on the estimated fair value of the award on date of grant. We measure compensation cost at the grant date based on the estimated fair value of the award and recognize compensation cost upon the probable attainment of a
specified performance condition or over a service period. We use the Black-Scholes option pricing model to estimate
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the fair value for purposes of accounting and disclosures. In calculating this fair value, there are certain highly subjective assumptions that we use, consisting of estimated market value of our
stock, the expected life of the option, risk-free interest rate, dividend yield, and volatility. The use of different estimates for any one of these assumptions could have a material impact on the amount of calculated compensation expense.
Income Taxes
We provide for income taxes pursuant to the
liability method. The liability method requires recognition of deferred income taxes 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 carryforward prior to its expiration, is more likely than not.
We
recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the 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,
2013 Compared to Year Ended December 31, 2012
Net revenue
. Net revenue increased $8.5 million, or 9.1%, to $101.3 million during 2013
from $92.9 million during 2012. The increase in revenue reflects an increase in solar systems constructed to a record 29.7 megawatts in 2013 from 26.6 megawatts in 2012.
Gross profit
. Gross profit decreased $722,000, or 3.1%, to $22.3 million during 2013 from $23.0 million during 2012. As a percentage of net revenue,
gross profit decreased to 22.0% during 2013 from 24.8% during 2012. The decline in gross profit reflects competitive pricing pressure as well as the adverse impact of inclement weather on labor utilization efficiency in the four quarters of 2013.
Selling and operating expenses
. Selling and operating expenses decreased $4.1 million, or 13.9%, to $25.7 million during 2013 from $29.8 million
during 2012. As a percentage of net revenue, selling and operating expenses decreased to 25.3% during 2013 from 32.1% during 2012. The decrease in selling and operating expenses is attributable to consolidation of functions in our Colorado office
and resulting reductions in headcount.
General and administrative expenses
. General and administrative expenses decreased $2.0 million, or 21.9%,
to $7.0 million during 2013 from $8.9 million during 2012. As a percentage of net revenue, general and administrative expenses decreased to 6.9% during 2013 from 9.6% during 2012. The decrease in general and administrative expenses is due to
consolidation of back-office functions in our Colorado office and resulting decreases in headcount.
Acquisition and other costs
. Acquisition and
other costs were $2.0 million during 2013 and were the result of our acquisition of Syndicated, the acquisition of Mercury, which closed on January 14, 2014.
Interest income and expense
. Net interest income was $1.1 million for 2013 The 2013 amount was impacted by a non-cash benefit of approximately $2.0
million recorded as interest income arising from the application of fair value accounting to the common stock warrant liability of approximately $15.1 million at December 31, 2013. Excluding the benefit, interest expense was approximately $0.9
million for 2013 compared to approximately $0.8 million for 2012. The increase reflects interest charges related to the revolving line of credit.
Income Tax Expense.
Income tax expense was $58,000 for 2013, representing state income taxes not offset by the loss from operations.
Net income (loss).
As a result of the above factors, our net loss was $11.3 million, or $0.38 per share, during 2013 compared to $47.2 million, or
$1.77 per share, during 2012.
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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Net revenue
. Net revenue decreased $16.4 million, or 15.0%, to $92.9 million during 2012 from $109.3 million during 2011. The revenue decline was
primarily attributable to the direct supplying to customers by financing companies of certain components used in residential installation. Sourcing of such components in conjunction with the associated financing allowed residential customers to take
advantage of certain expiring tax benefits, and are referred to as safe harbor installations and amounted to $9.6 million in 2012. While we recognize lower revenue from safe harbor installations, our gross margins are similar to non-safe
harbor installations. In addition, revenue from commercial customer installations declined by approximately $6.0 million due to a lower average sales price per watt installed.
Gross profit
. Gross profit decreased $4.8 million, or 17.3%, to $23.0 million during 2012 from $27.9 million during 2011. As a percentage of net
revenue, gross profit decreased to 24.8% during 2012 from 25.5% during 2011. The decrease in gross profit was due to a higher proportion of commercial installations, which have lower gross profit margins than residential installations, as well as
lower year over year average margins on those commercial installations.
Selling and operating expenses
. Selling and operating expenses increased
$6.2 million, or 26.1%, to $29.8 million during 2012 from $23.6 million during 2011. As a percentage of net revenue, selling and operating expenses increased to 32.1% during 2012 from 21.6% during 2011. The increase in selling and operating expenses
is attributable to costs associated with the integration of Alteris that resulted in the centralization of functions in our Colorado corporate head office.
General and administrative expenses
. General and administrative expenses increased $4.8 million, or 116.8%, to $8.9 million during 2012 from $4.1
million during 2011. As a percentage of net revenue, general and administrative expenses increased to 9.6% during 2012 from 3.8% during 2011. The increase in general and administrative expenses is due to investments in our Louisville, Colorado head
office, in management and leadership talent, and in shared services personnel subsequent to the Alteris merger, and executive recruiting fees.
Acquisition-related costs
. Acquisition-related costs were $2.4 million during 2011 and were the result of our acquisition of Alteris.
Goodwill and other asset impairments.
Goodwill and other asset impairments were $22.0 million for 2012 and were comprised of noncash impairment charges
of $19.7 million for goodwill, $2.1 million for property and equipment, and $0.2 million for other intangibles. We estimated the fair value of our business for the intangibles impairment analysis based on the quoted market price for our Class A
common stock (level one input of the fair value hierarchy), as adjusted by our judgmental qualitative factors (level three of the fair value hierarchy). The impairment of our property and equipment was based on market place property comparables
(level two of the fair value hierarchy). These noncash impairments were necessitated by the trading price of our Class A common stock, recent operating losses, and our financial forecasts.
Income Tax Expense.
Income tax expense was $8.7 million for 2012 and includes a $16.1 million noncash charge for the establishment of a valuation
allowance for all of our net deferred tax assets.
Net income (loss).
As a result of the above factors, our net loss was $47.2 million, or $1.77
per share, during 2012 compared to $1.9 million, or $0.08 per share, during 2011.
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Liquidity and Capital Resources
Our capital needs arise from capital related to acquisitions of new businesses, working capital required to fund our purchases of solar PV modules and
inverters, 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 may fluctuate from time to time.
To the extent we have or can arrange available capital, we
plan to continue to pursue acquisitions and other opportunities to expand our sales territories, technologies, and products and increase our sales and marketing programs as needed. We did not have any material commitments for capital expenditures as
of December 31, 2013, and we do not presently have any plans for future material capital expenditures.
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On December 19, 2011, several of our wholly owned subsidiaries entered into a Loan and Security Agreement with
Silicon Valley Bank (as amended by the First Loan Modification Agreement, dated as of August 28, 2012, the Second Loan Modification and Reinstatement Agreement, dated as of November 13, 2012, the Third Loan Modification Agreement, dated as of March
27, 2013, the Fourth Loan Modification Agreement, dated as of September 26, 2013, and the Fifth Loan Modification Agreement, dated as of November 5, 2013, the Loan Agreement). Originally, the Loan Agreement provided for a revolving line
of credit. In the Fifth Loan Modification Agreement, dated as of November 5, 2013, Silicon Valley Bank also agreed to extend a term loan to the borrowers. Currently, the following of Real Goods Solars wholly owned subsidiaries are parties to
the Loan Agreement: Real Goods Energy Tech, Inc., Real Goods Trading Corporation, Alteris Renewables, Inc., and Real Goods Syndicated, Inc.
As amended by
the Fourth Loan Modification Agreement, dated as of September 26, 2013, the amount of available credit under the revolving line of credit is $6.5 million, subject to the Borrowing Base (as defined in the Loan Agreement) of 75% of Eligible Accounts
(as defined in the Loan Agreement). The Fourth Loan Modification Agreement also extended the maturity date from September 30, 2013 to September 29, 2014 and permitted repayment of certain subordinated debt held by Gaiam and Riverside, subject to our
meeting certain liquidity thresholds and certain other subordination conditions are met. Additionally, the Fourth Loan Modification Agreement increased the liquidity ratio with which the borrowers must comply and added a covenant obligating the
borrowers to meet certain EBITDA thresholds each quarter. The Fourth Loan Modification Agreement also increased the interest rate on borrowings. As a result, the interest rate on borrowings under the revolving line of credit is the greater of (a)
the greater of the banks prime rate and 4.00%, plus 4.00 and (b) 8.00%. The interest rate accruing on borrowings under the revolving line of credit during a Streamline Period (as defined in the Loan Agreement) is the greater of (i) the greater
of the banks prime rate and 4.00%, plus 2.00%, and (ii) 6.00%.
Pursuant to the terms of the Fourth Loan Modification Agreement, Real Goods
Syndicated, Inc. joined as a party to the Loan Agreement and granted a security interest in substantially all of its assets to Silicon Valley Bank. Also, pursuant to the terms of the Fourth Loan Modification Agreement, the borrowers, Real Goods
Solar and Silicon Valley Bank also entered into an Intellectual Property Security Agreement, pursuant to which the borrowers and Real Goods Solar pledged certain copyrights, trademarks, patents and mask works to secure the obligations of the
borrowers under the Loan Agreement.
The borrowers paid Silicon Valley Bank a $65,000 extension fee and agreed to reimburse the bank for certain expenses
incurred in connection with entering into the Fourth Loan Modification Agreement.
The Loan Agreement requires the borrowers to pay a final payment fee of
$40,000 in cash upon termination or maturity of the revolving line of credit.
On November 5, 2013, the parties to the Loan Agreement entered into a Fifth
Loan Modification Agreement. Under the Fifth Loan Modification Agreement, Silicon Valley Bank agreed to extend to the borrowers a term loan of up to $2.0 million (the Term Loan) under the terms of the Loan Agreement in addition to the
$6.5 million revolving line of credit. The Term Loan matures on September 29, 2014. The borrowers are required to make monthly payments of interest only with respect to the Term Loan with the aggregate principal balance of the Term Loan, together
with any accrued but unpaid interest, due and payable on the maturity date. The borrowers may prepay the Term Loan in whole or in part at any time without penalty. The proceeds of the Term Loan are required to be used to repay in full the
outstanding indebtedness owed to Gaiam under the $1.7 loan and the $1.0 loan described below. The Fifth Loan Modification Agreement requires the borrowers to pay a final payment fee of $150,000 in cash upon termination or maturity of the Term Loan.
All borrowings under the Term Loan are collateralized by a security interest in substantially all assets of the borrowers other than the limited
liability company interests in Alteris Project Financing Company LLC, and bear interest at (a) the greater of the banks prime rate or 4.00%, plus (b) 2.00% (or 10.00% during an event of default). The borrowers are obligated to pay to Silicon
Valley Bank a final payment fee of $150,000 on or before the Term Loan maturity date. In addition, pursuant to the terms of the Fifth Loan Modification Agreement, at any time when (a) the borrowers unrestricted cash at Silicon Valley Bank,
less (b) all outstanding obligations of borrowers owed to Silicon Valley Bank, is less than $2,000,000, the borrowers availability under the existing $6,500,000 line of credit will be reduced by an amount equal to the outstanding principal
balance of the Term Loan.
Silicon Valley Bank fully funded the Term Loan on November 5, 2013 at the borrowers request. We used the proceeds of the
Term Loan together with other available cash on hand to pay in full all indebtedness owed to Gaiam on the same day, as further described below.
We
entered into a consent agreement with Silicon Valley Bank on May 10, 2013, to extend until June 30, 2013 the requirement that we obtain net proceeds of not less than $3.4 million from borrowing under a new subordinated debt agreement. In addition,
until receipt of such proceeds, we agreed to deposit with Silicon Valley Bank $500,000 of unrestricted cash, which it is required to maintain under the terms of the Loan Agreement, in a restricted account at the bank. Although we explored new
financing alternatives, we were unable to comply with the subordinated debt requirement by June 30, 2013. However, Silicon Valley Bank agreed that the terms of the consent agreement were met before June 30, 2013 based on the private placement closed
on June 3, 2013. As further discussed under Item 9B in this Form 10-K, the borrower entered into a Waiver Agreement with Silicon Valley Bank on March 23, 2014 pursuant to which Silicon Valley Bank agreed to waive a default for the quarterly
compliance period ended December 31, 2013 and certain covenant testing for the quarterly compliance period ending March 31, 2014.
Upon the closing of the
Alteris transaction on December 19, 2011, we received commitments from Riverside to make us a single loan of up to $3.15 million and from Gaiam to loan us up to $1.7 million. Gaiam funded its loan commitment on December 30, 2011. Riverside loaned us
$3.0 million on May 4, 2012 and another $150,000 on June 20, 2012. The loans originally were for a period of 12 months. The maturity dates for these loans have been extended and Riversides $3.0 million loan is due September 3, 2014,
Riversides $150,000 loan is due October 29, 2014, and, at the time of repayment, Gaiams $1.7 million loan was due April 30, 2014. The loans bear interest at a rate of 10%. If we repay the loans owed to Riverside on or before their
respective maturity date, the accrued interest is waived. On April 23, 2013, we entered into a conversion agreement with Gaiam pursuant to which the principal amount of Gaiams $1.7 million promissory note was reduced by $100,000 in exchange
for 62,111 shares of our Class A common stock. The conversion ratio was determined based on the closing market price of our Class A common stock on the date of the agreement. As of November 20, 2013, we owed $3.15 million to Riverside on these
loans. We have not paid any interest or principal on Riversides loan. On November 5, 2013, we repaid the indebtedness owed to Gaiam under the $1.7 million loan.
On November 13, 2012, we entered into a Loan Commitment with Gaiam and Riverside pursuant to which each agreed to advance to us up to an additional $1.0
million in cash upon request from us until March 31, 2013 at an annual interest rate of 10% and with an original maturity date of April 26, 2013. During December 2012, we requested and received an advance of $1.0 million from each of Gaiam and
Riverside under the Loan Commitment. On November 5, 2013, we paid in full the indebtedness owed to Gaiam under the $1.0 million loan. The maturity date for Riversides loans has been extended until April 26, 2014. We have not yet made any
payments of principal or interest on Riversides loan and the full amount of the principal remains outstanding. Furthermore, as required by the Loan Commitment, we executed with Gaiam an option agreement permitting Gaiam to purchase for
$200,000 all tenant improvements constructed by us in our principal office space leased from Gaiam and amended our lease to cancel, effective March 28, 2013, the $3 per square foot credit set forth in the current lease. If we completes a sale of at
least $50,000 of capital stock, then Riverside has (and Gaiam had during the existing of its loan) the option of converting all or any portion of the principal and the loan into securities in such sale at the same purchase price as paid by other
purchasers in such sale. If we fail to make payment of the principal and all interest owing on Riversides loan within 10 days of when due, then Riverside has the option to acquire an undivided 50% interest in our real property located in
Hopland, California (including all land and buildings) in exchange for cancellation of such principal and interest (Gaiam had the same option under the terms of its loan, while outstanding). This option is conditioned upon (a) the approval of the
transaction by our disinterested directors, and (b) the consent of our senior creditor, Silicon Valley Bank.
Riversides loans are subordinate to
all indebtedness for borrowed money owed by us to any lenders unaffiliated with us. Payment of the unpaid principal and all accrued but unpaid interest under a loan is accelerated and becomes immediately due and payable upon the occurrence of
certain events related to proceedings under bankruptcy, insolvency, receivership or similar laws, the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for us or a substantial part of our assets, and our
making a general assignment for the benefit of creditors.
Riverside owns approximately 22% and 17% of Real Goods Solar Class A common stock, as of
December 31, 2013 and March 21, 2014, respectively, and is one of our creditors. Pursuant to the terms of a Shareholders Agreement, Riverside has the right to designate a certain number of individuals for appointment or nomination to our board of
directors, tied to its ownership of our Class A common stock. At the time of the transactions described above, Gaiam was a related person, as such term is defined under the Securities and Exchange Commissions rules.
At December 31, 2013, our cash balance was $12.4 million, and our working capital was $13.4 million. As of March 21, 2014, we had $6.5 million of
available borrowing capacity under the revolving line of credit with Silicon Valley Bank. As of March 21, 2014, we had approximately $5.0 million of availability under the revolving line of credit. We will continue to make operational improvements
to reduce our operating cash requirements. Operational initiatives to reduce costs include productivity enhancements within support functions through greater use of information technology and other process improvements and greater project level
control over working capital deployed and labor utilization. While there can be no assurances, we believe our cash on hand, cash expected to be generated from operations, borrowing capacity under our revolving line of credit, potential security
sales under our $200 million self registration, and cash savings through further operational efficiencies should be sufficient to fund our continuing operations and meet our current debt repayment obligations through at least calendar year 2014.
However, no assurance can be given that we will achieve those objectives. Further, our projected cash needs may change as a result of unforeseen operational difficulties or other factors.
If we encounter unplanned operational difficulties, we may not have sufficient funds to repay any outstanding borrowings when they come due or to fund our
operating cash needs. These circumstances would require us to obtain financing from another source or raise additional capital through debt financing, equity financing or capital contributions from shareholders, if available to us. There can be no
assurance that we will successfully obtain new financing.
Cash Flows
The following table summarizes our primary sources (uses) of cash during the periods presented:
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Years ended December 31,
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(in thousands)
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2013
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2012
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2011
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Net cash provided by (used in):
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Operating activities
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$
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(16,408)
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$
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(12,688)
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$
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1,965
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Investing activities
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(1,742)
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(196)
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3,468
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Financing activities
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20,209
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11,461
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(4,743)
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Net increase (decrease) in cash and cash equivalents
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$
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2,059
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$
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(1,423)
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$
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690
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Operating activities
. Our operating activities used net cash of $16.4 million and $12.7 million during 2013 and 2012,
respectively. Our net cash used in operating activities during 2013 was primarily attributable to our net loss of $11.3 million, decreased accounts payable and accrued liabilities of $4.4 million, increased inventory of $1.0 million and decreased
billings in excess of costs of $2.6 million, partially offset by decreased accounts receivable of $2.0 million and increased costs in excess of billings of $732,000. Our net cash used by operating activities during 2012 was primarily attributable to
our net loss of $47.2 million, decreased accounts payable and accrued liabilities of $12.1 million, and decreased deferred revenue and other current liabilities of $2.0 million, partially offset by noncash impairment of intangibles of $22.0 million,
deferred income tax benefit of $8.7 million, decreased accounts receivable of $7.6 million and decreased inventory of $6.6 million.
Investing
activities
. Our investing activities used net cash of $1.7 million and $0.2 million during 2013 and 2012, respectively. Our net cash used by investing activities during 2013 was primarily attributable to the purchase of property and equipment
for $0.6 million and consideration paid in our acquisition of Syndicated for $1.2 million. Our net cash used by investing activities during 2012 was primarily attributable to the purchase of property and equipment for $0.2 million, partially offset
by a decrease in restricted cash of $0.2 million.
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Financing activities.
Our financing activities provided net cash of $20.2 million and $11.5 million
during 2013 and 2012, respectively. Our net cash provided by financing activities during 2013 was primarily the result of net proceeds from the issuance of the common shares during the year in the aggregate amount of $27.3 million and borrowing
under the term loan with SVB in the amount of $2.0 million, partially offset by payments on our line of credit of $6.5 million, and repayment in full of our debt to Gaiam in the amount of $2.7 million. Our net cash provided by financing activities
during 2012 was primarily the result of borrowings on our line of credit of $6.5 million and loans from related parties of $5.2 million, partially offset by payments on debt and capital lease obligations of $0.4 million.
In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, non-controlling investment, strategic relationship and
other business combination opportunities in 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.
While there can be no assurances, we believe our cash on hand, cash raised through debt commitments, cash expected to be generated from
operations, cash obtainable from additional investors, and cash savings through further operational efficiencies should be sufficient to fund our continuing operations and meet our current debt repayment obligations through at least calendar year
2014. However, our projected cash needs may change as a result of unforeseen operational difficulties or other factors.
We will continue to make
operational improvements to reduce our operating cash requirements. Operational initiatives to reduce costs include productivity enhancements within support functions through greater use of information technology and other process improvements and
greater project level control over working capital deployed and labor utilization. We expect to be able to continue to operate through 2014, and have adequate cash flow to meet our debt obligations.
Contractual Obligations
We have commitments under
operating leases and various service agreements with Gaiam (see Notes 7 and 8 to our consolidated financial statements), but do not have any significant outstanding commitments under long-term debt obligations or purchase obligations. The
following table shows our commitments to make future payments under our operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
|
< 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
> 5 yrs
|
|
Operating lease obligations
|
|
$
|
1,513
|
|
|
$
|
747
|
|
|
$
|
766
|
|
|
$
|
|
|
|
$
|
|
|
To the extent we become entitled to utilize certain loss carryforwards relating to periods prior to our initial public
offering, 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 recognized a valuation allowance against all of our deferred tax
assets as of the effective date of our tax sharing agreement with Gaiam, May 13, 2008. These net operating loss carryforwards begin to expire in 2020 if not utilized. Due to Gaiams step acquisitions of our company, we experienced
ownership changes as defined in Section 382 of the Internal Revenue Code. Accordingly, our use of the net operating loss carryforwards is limited by annual limitations described in Sections 382 and 383 of the Internal Revenue Code.
As of December 31, 2013, $46.3 million of these net operating loss carryforwards remained available for current and future utilization, meaning that potential future payments to Gaiam, which would be made over a period of several years, could
therefore aggregate to approximately $15.7 million based on current tax rates.
As a condition of entering into some of our construction contracts, we had
surety bonds outstanding of approximately $2.8 million at December 31, 2013.
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, which have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
Item 8.
|
Financial statements
|
28
Report of Independent registered public accounting firm
To the Board of Directors and Shareholders of
Real Goods
Solar, Inc.
Louisville, Colorado
We have audited the
accompanying consolidated balance sheets of Real Goods Solar, Inc. and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in shareholders equity, and
cash flows for each of the years in the three year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. 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 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 Companys 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, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Real Goods Solar, Inc. and subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2013,
in conformity with accounting principles generally accepted in the United States of America.
EKS&H LLLP
March 28, 2014
Denver, Colorado
29
REAL GOODS SOLAR, INC.
Consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands, except share and per share data)
|
|
2013
|
|
|
2012
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
12,449
|
|
|
$
|
10,390
|
|
Accounts receivable, net
|
|
|
11,926
|
|
|
|
13,902
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
4,556
|
|
|
|
5,288
|
|
Inventory, net
|
|
|
6,715
|
|
|
|
5,711
|
|
Deferred costs on uncompleted contracts
|
|
|
1,421
|
|
|
|
896
|
|
Other current assets
|
|
|
1,270
|
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
38,337
|
|
|
|
38,317
|
|
Property and equipment, net
|
|
|
3,084
|
|
|
|
3,991
|
|
Goodwill
|
|
|
1,867
|
|
|
|
|
|
Other intangibles, net
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
43,768
|
|
|
$
|
42,308
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
|
|
|
$
|
6,498
|
|
Accounts payable
|
|
|
14,059
|
|
|
|
15,951
|
|
Accrued liabilities
|
|
|
3,611
|
|
|
|
5,156
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
395
|
|
|
|
2,975
|
|
Term loan
|
|
|
2,000
|
|
|
|
|
|
Related party debt
|
|
|
4,150
|
|
|
|
6,850
|
|
Deferred revenue and other current liabilities
|
|
|
787
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
25,002
|
|
|
|
37,940
|
|
Accrued liabilities
|
|
|
446
|
|
|
|
443
|
|
Common stock warrant liability
|
|
|
15,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
40,519
|
|
|
|
38,383
|
|
|
|
|
|
|
|
|
|
|
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; 36,415,839 and 26,693,696 shares issued and
outstanding at December 31, 2013 and 2012, respectively
|
|
|
4
|
|
|
|
3
|
|
Class B common stock, par value $.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
92,808
|
|
|
|
82,185
|
|
Accumulated deficit
|
|
|
(89,563)
|
|
|
|
(78,263)
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
3,249
|
|
|
|
3,925
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
43,768
|
|
|
$
|
42,308
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
30
REAL GOODS SOLAR, INC.
Consolidated statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(in thousands, except per share data)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net revenue
|
|
$
|
101,342
|
|
|
$
|
92,891
|
|
|
$
|
109,257
|
|
Cost of goods sold
|
|
|
79,032
|
|
|
|
69,859
|
|
|
|
81,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
22,310
|
|
|
|
23,032
|
|
|
|
27,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and operating
|
|
|
25,667
|
|
|
|
29,807
|
|
|
|
23,634
|
|
General and administrative
|
|
|
6,973
|
|
|
|
8,909
|
|
|
|
4,109
|
|
Acquisition and other costs
|
|
|
2,010
|
|
|
|
|
|
|
|
2,393
|
|
Goodwill and other asset impairments
|
|
|
|
|
|
|
22,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
34,650
|
|
|
|
60,728
|
|
|
|
30,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,340)
|
|
|
|
(37,696)
|
|
|
|
(2,276)
|
|
Interest income (expense)
|
|
|
1,098
|
|
|
|
(790)
|
|
|
|
(184)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(11,242)
|
|
|
|
(38,486)
|
|
|
|
(2,460)
|
|
Income tax expense (benefit)
|
|
|
58
|
|
|
|
8,720
|
|
|
|
(560)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,300)
|
|
|
$
|
(47,206)
|
|
|
$
|
(1,900)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.38)
|
|
|
$
|
(1.77)
|
|
|
$
|
(0.08)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,486
|
|
|
|
26,673
|
|
|
|
23,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
29,486
|
|
|
|
26,673
|
|
|
|
23,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
31
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, 2010
|
|
|
16,157,339
|
|
|
$
|
1
|
|
|
|
2,153,293
|
|
|
$
|
|
|
|
$
|
60,726
|
|
|
$
|
(29,157)
|
|
|
$
|
31,570
|
|
Issuance of common stock and other equity changes related to compensation
|
|
|
29,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
533
|
|
|
|
|
|
|
|
533
|
|
Issuance of common stock and stock options related to an acquisition
|
|
|
8,700,000
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
21,671
|
|
|
|
|
|
|
|
21,673
|
|
Repurchase of common stock
|
|
|
(379,400)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,070)
|
|
|
|
|
|
|
|
(1,070)
|
|
Conversion of Class B common stock to Class A common stock
|
|
|
2,153,293
|
|
|
|
|
|
|
|
(2,153,293)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,900)
|
|
|
|
(1,900)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
26,660,640
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
81,860
|
|
|
|
(31,057)
|
|
|
|
50,806
|
|
Issuance of common stock and other equity changes related to compensation
|
|
|
33,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
|
|
|
|
325
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,206)
|
|
|
|
(47,206)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
26,693,696
|
|
|
$
|
3
|
|
|
|
|
|
|
$
|
|
|
|
$
|
82,185
|
|
|
$
|
(78,263)
|
|
|
$
|
3,925
|
|
Issuance of common stock and other equity changes related to compensation
|
|
|
132,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509
|
|
|
|
|
|
|
|
509
|
|
Establishment of liability related to common stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,597)
|
|
|
|
|
|
|
|
(17,597)
|
|
Issuance of common stock related to equity funding, net of offering costs of $2,485
|
|
|
9,266,974
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
26,833
|
|
|
|
|
|
|
|
26,834
|
|
Issuance of common stock related to the exercise of warrants
|
|
|
260,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
Issuance of warrants to Silicon Valley Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
278
|
|
Issuance of common stock related to related party debt conversion
|
|
|
62,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,300)
|
|
|
|
(11,300)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
36,415,839
|
|
|
$
|
4
|
|
|
|
|
|
|
$
|
|
|
|
$
|
92,808
|
|
|
$
|
(89,563)
|
|
|
$
|
3,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
32
REAL GOODS SOLAR, INC.
Consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,300)
|
|
|
$
|
(47,206)
|
|
|
$
|
(1,900)
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,019
|
|
|
|
1,186
|
|
|
|
811
|
|
Amortization
|
|
|
|
|
|
|
245
|
|
|
|
210
|
|
Share-based compensation expense
|
|
|
509
|
|
|
|
325
|
|
|
|
524
|
|
Deferred income tax expense (benefit)
|
|
|
|
|
|
|
8,655
|
|
|
|
(623)
|
|
Change in fair value of common stock warrant liability
|
|
|
(2,026)
|
|
|
|
|
|
|
|
|
|
Goodwill and other asset impairments
|
|
|
|
|
|
|
22,012
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effects from acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
1,976
|
|
|
|
7,639
|
|
|
|
2,231
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
732
|
|
|
|
123
|
|
|
|
(5,328)
|
|
Inventory, net
|
|
|
(1,004)
|
|
|
|
6,554
|
|
|
|
(862)
|
|
Deferred costs on uncompleted contracts
|
|
|
(525)
|
|
|
|
417
|
|
|
|
512
|
|
Other current assets
|
|
|
860
|
|
|
|
(814)
|
|
|
|
1,041
|
|
Accounts payable
|
|
|
(1,892)
|
|
|
|
(13,700)
|
|
|
|
6,993
|
|
Accrued liabilities
|
|
|
(2,454)
|
|
|
|
1,650
|
|
|
|
(1,533)
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
(2,580)
|
|
|
|
830
|
|
|
|
83
|
|
Deferred revenue and other current liabilities
|
|
|
277
|
|
|
|
(1,994)
|
|
|
|
1,914
|
|
Payable to Gaiam
|
|
|
|
|
|
|
1,390
|
|
|
|
(2,108)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(16,408)
|
|
|
|
(12,688)
|
|
|
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(576)
|
|
|
|
(368)
|
|
|
|
(678)
|
|
Change in restricted cash
|
|
|
|
|
|
|
172
|
|
|
|
730
|
|
Purchase of subsidiary
|
|
|
(1,166)
|
|
|
|
|
|
|
|
|
|
Cash from acquired business
|
|
|
|
|
|
|
|
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,742)
|
|
|
|
(196)
|
|
|
|
3,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal borrowings (payments) on related party debt
|
|
|
(2,600)
|
|
|
|
5,150
|
|
|
|
1,700
|
|
Proceeds from issuance of common stock
|
|
|
27,333
|
|
|
|
|
|
|
|
|
|
Principal borrowings (payments) on revolving line of credit, net
|
|
|
(6,498)
|
|
|
|
6,498
|
|
|
|
(3,119)
|
|
Principal borrowings on term loan
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
Principal payments on debt obligations
|
|
|
(26)
|
|
|
|
(187)
|
|
|
|
(2,254)
|
|
Repurchase of Class A common stock, including related costs
|
|
|
|
|
|
|
|
|
|
|
(1,070)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
20,209
|
|
|
|
11,461
|
|
|
|
(4,743)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
2,059
|
|
|
|
(1,423)
|
|
|
|
690
|
|
Cash at beginning of year
|
|
|
10,390
|
|
|
|
11,813
|
|
|
|
11,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
12,449
|
|
|
$
|
10,390
|
|
|
$
|
11,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
57
|
|
|
$
|
38
|
|
|
$
|
208
|
|
Interest paid
|
|
$
|
254
|
|
|
$
|
538
|
|
|
$
|
187
|
|
Non-cash items
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrant liability recorded in conjunction with equity fundings
|
|
$
|
17,597
|
|
|
$
|
|
|
|
$
|
|
|
Warrants to purchase 212,535 shares issued in conjunction with bank debt extension
|
|
$
|
278
|
|
|
$
|
|
|
|
$
|
|
|
Class A common stock issued in conjunction with debt conversion, 62,111 shares
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
|
|
Class A common stock issued in conjunction with acquisition, 400,000 shares
|
|
$
|
916
|
|
|
$
|
|
|
|
$
|
21,576
|
|
See accompanying notes to consolidated financial statements.
33
Notes to consolidated financial statements
1. Principles of Consolidation, Organization and Nature of Operations
Real Goods Solar, Inc. (RGS or Company) is a leading residential and commercial solar energy engineering,
procurement, and construction firm. The Company was incorporated in Colorado on January 29, 2008 under the name Real Goods Solar, Inc. The Companys initial public offering of common stock occurred on May 7, 2008. On January 15,
2014, the Company began doing business as RGS Energy and changed its ticker symbol to RGSE on February 24, 2014.
The consolidated financial
statements include the accounts of Real Goods Solar 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,
which include the Companys accounts and those of its 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.
Liquidity Update
At December 31, 2013, the
Companys cash balance was $12.4 million. The Companys related party debt of $2.7 million owed to Gaiam, Inc. (Gaiam) was repaid on November 5, 2013 while its related party debt of $4.15 million owed to Riverside
Renewable Energy Investments, LLC (Riverside) was extended; $1.0 million is due April 26, 2014, $3.0 million is due September 3, 2014 and $150,000 is due October 29, 2014. During September, 2013, RGS entered into the Fifth
Loan Modification Agreement with Silicon Valley Bank (SVB), which extended the revolving line of credit maturity date to September 29, 2014 and provided RGS with a $2.0 million term loan.
NASDAQ Non-Compliance
During 2012, the Company received
four different non-compliance notices from The Nasdaq Stock Market (NASDAQ). The Company regained compliance as of February 21, 2013.
2. Significant Accounting Policies
No changes were made to the Companys significant accounting policies during the year ended December 31, 2013.
Cash
Cash represents demand deposit accounts with
financial institutions that are denominated in U.S. dollars.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The
Company makes estimates of the collectability of its accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. The allowance for doubtful accounts was $618,000 and $1.1 million at
December 31, 2013 and 2012, respectively. If the financial condition of our customers or the public utilities or financing companies were to deteriorate such that their ability to make payments to us was impaired, additional allowances could be
required.
Inventory
Inventory consists primarily of
solar energy system components (such as solar panels and inverters) located at the Companys various warehouses and finished goods held for sale at its Solar Living Center located in Hopland, California. RGS states inventory at the lower of
cost (first-in, first-out method) or market. The Company identifies the inventory items to be written down for obsolescence based on the items current sales status and condition. The Company writes down discontinued or slow moving inventories
based on an estimate of the markdown to retail price needed to sell through its current stock level of the inventories. At December 31, 2013 and 2012, the Company estimated obsolete or slow-moving inventory to be $400,000 and $700,000,
respectively, net of estimated reserves.
34
Property and Equipment
The Company states property and equipment at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed on the
straight-line method over estimated useful lives, generally three to twenty years. RGS 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 Other Intangibles
Goodwill represents the excess of the purchase consideration over the estimated fair value of assets acquired less liabilities assumed in a business
acquisition. Goodwill is reviewed for impairment annually or more frequently if impairment indicators arise. As RGS operates in only one business segment, it assesses impairment at the Company level. The Company has the option of first assessing
qualitative factors to determine whether events and circumstances indicate that it is more likely than not that the fair value of the Company is less than its carrying amount. If it is determined that the fair value of the Company is more likely
than not greater than its carrying amount, then the two-step impairment test is unnecessary. If it is determined that the two-step impairment test is necessary, then for step one, RGS compares the estimated fair value of the Company with its
carrying amount, including goodwill. If the estimated fair value of the Company exceeds its carrying amount, the Companys goodwill considered not impaired. If the carrying amount of the Company exceeds its estimated fair value, the second step
of the goodwill impairment test to measure the amount of impairment loss is performed. The Company uses either a comparable market approach, traditional present value method, or some combination thereof to test for potential impairment. The use of
present value techniques requires us to make estimates and judgments about future cash flows. These cash flow forecasts are based on assumptions that are consistent with the plans and estimates RGS uses to manage its business. The 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.
The Companys goodwill balances were $1.9 million and zero at December 31, 2013 and 2012, respectively, and other intangibles balances were
$480,000 and zero at December 31, 2013 and 2012, respectively. The other intangibles are comprised of backlog acquired from Syndicated Solar, Inc. and will be amortized to selling and operating expenses over a period of less than 12 months.
The Company had impaired all goodwill and other intangibles at September 30, 2012 (see Note 4. Goodwill and Other Asset Impairments). For the year
ended December 31, 2012, amortization expense was $0.2 million. During the year ended December 31, 2013, the Company recorded $1.9 million of goodwill as a result of the acquisition of Syndicated Solar, Inc. There is no amortization
expense recorded for the year ended December 31, 2013.
Purchase Accounting
RGS accounts for business acquisitions using the purchase method. In determining the estimated fair value of certain acquired assets and liabilities, the
Company makes assumptions based upon historical and other relevant information and, in some cases, reports of independent valuation experts. Assumptions may be incomplete, and unanticipated events and circumstances may occur that could affect the
validity of such assumptions, estimates, or actual results. As a result of the acquisition of Syndicated and Mercury Energy, Inc., RGS incurred acquisition-related costs that are required to be expensed as incurred, including subsequent adjustments
to valuation entries made at the time of the acquisition. For the twelve months ended December 31, 2013, the Company recorded $2.0 million of such costs.
35
Revenue Recognition
Revenue are derived primarily from contracts for the installation of solar energy systems. RGS recognizes revenue from fixed price contracts using either the
completed contract or percentage-of-completion method, based on the size of the energy system installation. RGS recognizes revenue from energy system installations of less than 100 kilowatts, or kW, when the installation is substantially complete
and recognizes revenue from energy system installations equal to or greater than 100 kW on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to total estimated costs for each contract. The Company
recognizes amounts billed to customers for shipping and handling as revenue at the same time that the revenues arising from the product sale are recognized. RGS includes shipping and handling costs, which were approximately $500,000, $500,000, and
$100,000 for 2013, 2012, and 2011, respectively, in selling and operating expense along with other fulfillment costs.
The assets Costs in excess of
billings on uncompleted contracts and Deferred costs on uncompleted contracts represent costs incurred plus estimated earnings in excess of amounts billed on percentage-of-completion method contracts and costs incurred but deferred
until recognition of the related contract revenue on completed-method contracts, respectively. The liability Billings in excess of costs on uncompleted contracts represents billings in excess of related costs and earned profit on
percentage-of-completion method contracts. RGS bills our large installation customers for contract performance progress according to milestones defined in their respective contracts. The prerequisite for billing is the completion of an application
and certificate of payment form as per the contract, which is done after each month end. Unbilled receivables were immaterial at December 31, 2013 and 2012.
Deferred revenue consists of solar energy system installation fees billed to customers for projects which are not yet completed as on the balance sheet date.
Allocation of Costs
Historically, Gaiam provided
RGS with administrative, technical accounting advisory, public financial reporting and related office services under the Intercorporate Services Agreement. During 2013, the Companys reliance on Gaiam for services provided under the
Intercorporate Services Agreement decreased to the point that RGS and Gaiam terminated the agreement on December 19, 2013. The accompanying financial statements include an allocation of these expenses. The allocation is based on a combination
of factors, including revenue and operating expenses. The Company believes the allocation methodologies used are reasonable and result in an appropriate allocation of costs incurred by Gaiam and its subsidiaries on the Companys behalf.
However, these allocations may not be indicative of the cost of future services as the company operates on a standalone basis.
Share-Based
Compensation
RGS recognizes compensation expense for share-based awards based on the estimated fair value of the award on date of grant. The Company
measures compensation cost at the grant date fair value of the award and recognizes compensation expense based on the probable attainment of a specified performance condition or over a service period. The Company uses 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 12. Share-Based Compensation), consisting of 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.
Income Taxes
RGS provides for income taxes pursuant to
the liability method. The liability method requires recognition of deferred income taxes 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 is more likely than not. The Companys effective tax rate remains fairly consistent. RGS has significant net operating loss carryforwards and will re-evaluate at the end of each reporting period
whether it expects it is more likely than not that the deferred tax assets will be fully recoverable through the reversal of taxable temporary differences in future years as a result of normal business activities. The Company has agreed under our
tax sharing agreement with Gaiam to make payments to Gaiam as RGS utilizes certain of its net operating losses in the future (see Note 13. Income Taxes).
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. RGS measures 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, RGS is required to make many subjective assumptions
and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Companys subjective assumptions and judgments which can materially
affect amounts recognized in its consolidated balance sheets and statements of operations. The result of the reassessment of the Companys tax positions did not have a material impact on its consolidated financial statements. RGS federal
and state tax returns for all years after 2009 are subject to future examination by tax authorities for all our tax jurisdictions. The Company recognizes interest and penalties related to income tax matters in interest expense and general and
administration expenses, respectively.
36
Net Loss Per Share
RGS computes net loss per share by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net
loss per share reflects the potential dilution that could occur if options or warrants to issue shares of the Companys Class A common stock were exercised. Weighted average common share equivalents of 7,012,000, 2,173,000 and 1,262,000
shares have been omitted from net loss per share for 2013, 2012 and 2011, respectively, as they are anti-dilutive.
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)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Numerator for basic and diluted net loss per share
|
|
$
|
(11,300)
|
|
|
$
|
(47,206)
|
|
|
$
|
(1,900)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic net loss per share
|
|
|
29,486
|
|
|
|
26,673
|
|
|
|
23,572
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common stock, stock options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators for diluted net loss per share
|
|
|
29,486
|
|
|
|
26,673
|
|
|
|
23,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per sharebasic
|
|
$
|
(0.38)
|
|
|
$
|
(1.77)
|
|
|
$
|
(0.08)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per sharediluted
|
|
$
|
(0.38)
|
|
|
$
|
(1.77)
|
|
|
$
|
(0.08)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration of Risk
RGS has a potential concentration of credit risk in our accounts receivable in that two financing companies that purchase and then lease installed solar energy
system to host users and two commercial customers accounted for 24%, 14%, 4% and 2% respectively, of our accounts receivable as of December 31, 2013.
The Company also has a potential concentration of supply risk in that during 2013 it purchased approximately 30% of the major components for its solar
installations from a single supplier.
Sales to the Companys three largest customers for 2013 accounted for approximately 21%, 12% and 6%,
respectively, of our total net revenue.
Use of Estimates and Reclassifications
The preparation of financial statements in accordance with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the
accompanying financial statements and disclosures. Although these estimates are based on managements knowledge of current events and actions the Company may undertake in the future, actual results may be different from the estimates.
Warrant Accounting
The Company accounts for common stock
warrants and put options in accordance with applicable accounting guidance provided in Financial Accounting Standards Board (FASB) ASC 480, Liabilities Distinguishing Liabilities from Equity, as either derivative liabilities or as
equity instruments depending on the specific terms of the warrant agreement. The common stock warrants are accounted for as a liability due to a provision which allows for the warrant holder to require redemption, at the intrinsic value of the
warrant, upon a change of control. We classify these derivative liabilities on the condensed consolidated balance sheets as a long term liability, which is revalued at each balance sheet date subsequent to the initial issuance. We use a Monte Carlo
pricing model to value these derivative 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. In building the
Monte Carlo pricing model, the Company assumed a 15% probability of a change in control and used 20 nodes (See Note 3. Fair Value Measurements). As a result, if factors change and different assumptions are used, the warrant liability and the change
in estimated fair value could be materially different. Changes in the fair value of the warrants are reflected in the condensed consolidated balance sheet as change in fair value of warrant liability, with an offsetting non-cash entry recorded
as interest.
37
During 2013, net non-cash credits of approximately $2 million were recorded as interest income to reflect changes
in fair value of outstanding warrants. In the event warrants are exercised or expire without being exercised, the fair value of the warrant liability is reduced by the number of warrants exercised or expired multiplied by the then fair value of the
each warrant. The tables below summarize warrant activity for 2013 and assumptions utilized to value the warrants (in thousands except for per warrant data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Warrant Issue Date
|
|
|
|
|
|
|
June 3, 2013
|
|
|
November 15,
2013
|
|
|
Total as of
December 31, 2013
|
|
Value of warrants issued
|
|
$
|
4,392
|
|
|
$
|
13,205
|
|
|
$
|
17,597
|
|
Changes in fair value, net
|
|
|
(175
|
)
|
|
|
(1,851
|
)
|
|
|
(2,026
|
)
|
Value of warrants exercised
|
|
|
(500
|
)
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of warrants at December 31, 2013
|
|
$
|
3,717
|
|
|
$
|
11,354
|
|
|
$
|
15,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of warrants outstanding
|
|
|
1,655
|
|
|
|
5,015
|
|
|
|
6,670
|
|
Assumptions used to estimate warrant values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
|
June 3, 2013
|
|
|
November 15, 2013
|
|
|
|
At Issuance
|
|
|
At December 31, 2013
|
|
|
At Issuance
|
|
|
At December 31, 2013
|
|
Class A Common Stock: Closing Market Price
|
|
$
|
2.94
|
|
|
$
|
3.02
|
|
|
$
|
3.21
|
|
|
$
|
3.02
|
|
Market Price Volatility
|
|
|
102.93
|
%
|
|
|
95
|
%
|
|
|
95
|
%
|
|
|
95
|
%
|
Expected average term of warrants, in years
|
|
|
5
|
|
|
|
4.5
|
|
|
|
5.5
|
|
|
|
5.5
|
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
3. Mergers and Acquisitions
Syndicated Solar, Inc.
On
August 9, 2013, the Company purchased certain assets and assumed certain current liabilities of Syndicated Solar, Inc. (Syndicated). The acquired assets include executed end user customer agreements together with associated solar
energy systems in various stages of completion and various systems used by Syndicated to acquire new customers. The acquisition enables the Company to expand its residential solar operations in Colorado and California and to expand its sales
presence into the state of Missouri. In connection with the acquisition, the former chief executive officer of Syndicated joined the Company as president of the residential division. The purchase consideration comprised cash of $250,000 and 400,000
shares of the Companys Class A common stock, with an aggregate fair value of $916,000 based on the closing price of the Companys Class A common stock on the acquisition date.
The table below summarizes the determination of fair value of the purchase consideration in the acquired business as of the acquisition date (in thousands):
|
|
|
|
|
Cash
|
|
$
|
250
|
|
Common stock
|
|
|
916
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
1,166
|
|
|
|
|
|
|
The table below summarizes the assessment of the estimated fair values of the assets acquired and liabilities assumed at the
acquisition date (in thousands). The Company has obtained a third-party valuation of the assets acquired and liabilities assumed.
|
|
|
|
|
Cash
|
|
$
|
90
|
|
Accounts receivable, net
|
|
|
580
|
|
Other current assets
|
|
|
1,188
|
|
Property and equipment
|
|
|
185
|
|
Intangible assets
|
|
|
480
|
|
Accounts payable
|
|
|
(2,220
|
)
|
Deferred revenue
|
|
|
(946
|
)
|
Other current liabilities
|
|
|
(58
|
)
|
|
|
|
|
|
Total identifiable net liabilities at fair value
|
|
|
(701
|
)
|
Goodwill
|
|
|
1,867
|
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
1,166
|
|
|
|
|
|
|
The Company assumed $2.2 million in accounts payable on the date of acquisition, including $1.6 million owed to a single
vendor. Concurrent with the acquisition, the Company paid $1.0 million to the vendor and recorded an accrued liability in the amount of $600,000. The vendors terms require six monthly payments of $100,000 through February 2014. The accrued
liability recorded was $200,000 and zero as of December 31, 2013 and March 21, 2014, respectively.
Intangible assets consist of the value of
contractual arrangements entered into between Syndicated and its customers to install solar energy systems for which installation had not yet commenced at the acquisition date.
Syndicated also has the potential to earn up to $250,000 in additional earn-out payments following the close of the 2013 fiscal year and an additional
1.3 million shares of unregistered Class A common stock in performance based earn-outs over the period August 9, 2013 to December 31, 2015. If earned, these payments will be recorded as compensation expense as earned.
The Company includes results from operations of acquired companies in its consolidated financial statements from their respective effective acquisition dates.
Pro forma financial information is not presented as the acquisition is not material to the condensed consolidated statements of operations. The revenue and earnings of the acquired business were not material to the condensed consolidated financial
statements.
38
Subsequent Events
Mercury Energy, Inc.
On January 14, 2014, the
Company obtained financial control, through an Agreement and Plan of Merger, of 100% of the voting equity interests of Mercury Energy, Inc. (Mercury). The total consideration transferred was comprised of 8.3 million shares of the
Companys Class A common stock valued at $32.0 million based on the closing market price of $3.83 per share on January 13, 2014. The consideration excluded $1.2 million of expenses that are reported as acquisition-related costs in the
consolidated statement of operations for the year ended December 31, 2013.
Elemental Energy, LLC d/b/a Sunetric.
The Company entered into a definitive agreement to obtain financial control, through a Membership Interest Purchase Agreement (Purchase Agreement),
of 100% of the membership interests of Elemental Energy, LLC d/b/a Sunetric on March 26, 2014. For further details about the acquisition, see Item 9B in this Form 10-K.
4. Goodwill and Other Asset Impairments
In accordance with the Financial Accounting Standards Boards accounting standards codification, the Company evaluated the
realizability of its tangible assets and determined based on market place property comparables (level two of the fair value hierarchy) that a valuation impairment charge of $2.1 million was necessary against the cost of its Hopland California
facility at September 30, 2012. Additionally, the Company performed impairment analyses of goodwill and other intangibles using the discounted cash flows method and write-offs of $19.7 million of goodwill and $200,000 of other intangibles were
made at September 30, 2012. The Company estimated the fair value of its business for the goodwill impairment analysis based on the quoted market price for its Class A common stock (level one input of the fair value hierarchy), as adjusted
by managements judgmental qualitative factors (level three of the fair value hierarchy). These noncash impairments were necessitated by the trading price of the Companys Class A common stock, recent operating losses, and financial
forecasts. The $22.0 million of noncash impairment charges are reported in goodwill and other asset impairments on the consolidated statement of operations for the year ended December 31, 2012.
5. 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)
|
|
2013
|
|
|
2012
|
|
Land
|
|
$
|
1,716
|
|
|
$
|
1,716
|
|
Buildings and leasehold improvements (a)
|
|
|
136
|
|
|
|
728
|
|
Furniture, fixtures and equipment
|
|
|
1,040
|
|
|
|
726
|
|
Website development
|
|
|
960
|
|
|
|
859
|
|
Vehicles and Machinery
|
|
|
3,185
|
|
|
|
3,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,037
|
|
|
|
7,700
|
|
Accumulated depreciation and amortization
|
|
|
(3,953)
|
|
|
|
(3,709)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,084
|
|
|
$
|
3,991
|
|
|
|
|
|
|
|
|
|
|
(a)
|
During 2012, the Company impaired $2.1 million of its buildings (see Note 4. Goodwill and Other Asset Impairments).
|
6. Revolving Line of Credit and Term Loan
Under a loan agreement, as amended, with Silicon Valley Bank (SVB Loan), the Company has a revolving line of credit that
provides for advances not to exceed $6.5 million based upon a borrowing base of 75% of eligible accounts receivable. All borrowings are collateralized by a security interest in substantially all of the Companys assets other than its interests
in Alteris Project Financing Company LLC, and bear interest at the greater of the banks prime rate or 4.00% plus 4.75%. The interest rate accruing on borrowings during a Streamline Period (as defined in the SVB Loan) is the greater of the
banks prime rate or 4.00% plus 2.00%. The original maturity date for the SVB Loan was October 30, 2012 and the maturity date was first extended to March 31, 2013 on October 30, 2012, then to September 30, 2013 on
March 27, 2013, and then to September 30, 2014 on September 29, 2013. The line of credit has a facility fee of 0.5% per year of the average daily unused portion of the available line of credit during the applicable calendar
quarter. We may reserve up to $500,000 for stand-by letters of credit under the line of credit. The SVB Loan establishing the line of credit contains various covenants, including a covenant requiring compliance with a liquidity ratio. The fourth
amendment to the SVB Loan required the borrowers to pay a final payment fee of $60,000 in cash upon termination or maturity of the revolving line of credit, which was reduced to $40,000 following our equity funding during June 2013 of $8.4 million
in net proceeds. The Company paid the final payment of $40,000 in conjunction with the Fifth Loan Modification Agreement. At December 31, 2013, RGS had zero of outstanding borrowings under this facility.
39
Also under the Fifth Loan Modification Agreement, SVB agreed to extend to RGS a term loan of up to $2.0 million
under the terms of the loan agreement (the Term Loan) in addition to the $6.5 million revolving line of credit. The Term Loan matures on September 29, 2014. RGS is required to make monthly payments of interest only on the Term Loan
and may prepay the Term Loan in whole or in part at any time without penalty. The proceeds of the Term Loan were used to repay in full the outstanding indebtedness owed to Gaiam, as required (see Note 8. Related Party Debt).
On March 23, 2014, our wholly-owned subsidiaries Real Goods Energy Tech, Inc., Real Goods Trading Corporation, Alteris Renewables, Inc. and Real Goods
Syndicated, Inc. entered into a Waiver Agreement with Silicon Valley Bank pursuant to which Silicon Valley Bank waived (i) our failure to comply with the minimum EBITDA financial covenant contained in Section 6.9(b) of the Loan Agreement, for the
quarterly compliance period ended December 31, 2013, and (ii) testing of the minimum EBITDA financial covenant contained in Section 6.9(b) of the Loan Agreement solely for the quarterly compliance period ending March 31, 2014. In connection with
executing the Waiver Agreement, we paid to Silicon Valley Bank a fee of $10,000. As of March 21, 2014, we had no outstanding borrowings under the revolving credit facility, and $2.0 million outstanding under the Term Loan, under the Loan Agreement.
7. Payable to Gaiam
The Company is engaged in several related party transactions with Gaiam. During 2013, through open market sales of shares by Gaiam, its
ownership declined to less than 10% of the Companys issued and outstanding shares of Class A common stock.
Historically, the Company has had a
need for certain services to be provided by Gaiam under the Intercorporate Services Agreement and Industrial Building Lease Agreement for the Companys corporate headquarters. These services may include, but are not limited to, administrative,
technical accounting advisory, public financial reporting and certain occupancy and related office services as required from time to time. Previously, the Company determined that it was not cost effective to obtain and separately maintain the
personnel and infrastructure associated with these services with a complement of full time, skilled employees. Also see Note 9. Commitments and Contingencies Operating Leases.
The Company significantly reduced its reliance on Gaiam to provide services under the Intercorporate Services Agreement during 2013. The agreement terminated
was on December 19, 2013.
During 2011, the Company completed a project for its then Chairman to design and install an upgrade to an existing solar
power system originally built in 1997 for his residence. The contract price, or revenue recognized, was $244,000, which was priced at a customary rate for work performed for the Companys employees.
Consideration payable to Gaiam and expensed during 2011 for additional services under the Intercorporate Services Agreement and agreeing to amend the existing
Intercorporate Services Agreement and Tax Sharing Agreement totaled $672,000.
8. Related Party Debt
Related party debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Related Party
|
|
2013
|
|
|
2012
|
|
Riverside
|
|
$
|
4,150
|
|
|
$
|
4,150
|
|
Gaiam
|
|
|
|
|
|
|
2,700
|
|
|
|
|
|
|
Total
|
|
$
|
4,150
|
|
|
$
|
6,850
|
|
|
|
|
|
|
Related party debt at December 31, 2013 consisted of $4.15 million owed to Riverside. At December 31, 2012, the
Companys related party debt was comprised of $2.7 million owed to Gaiam and $4.15 million owed to Riverside. As of December 31, 2013, the Riverside loans were due as follows: $1.0 million by April 26, 2014,
$3.0 million by September 3, 2014, and $150,000 by October 29, 2014. These loans bear interest at an annual rate of 10%. The accrued interest on the amounts owed to Riverside will be waived if the Company repays the $3.0 million
and $150,000 loans owed to Riverside on or before their respective maturity date. As conditions for Gaiam extending the maturity date of its then existing $1.7 million loan to RGS from December 30, 2012 to April 30, 2013 and loaning
RGS an additional $1.0 million, the Company had to pay all interest owed on the then existing Gaiam loan of $1.7 million, execute and deliver to Gaiam in the near future an option agreement, reasonably acceptable to both parties,
permitting Gaiam to purchase for $200,000 all tenant improvements constructed by RGS in its principal office space leased from Gaiam; and amend the Companys facility lease with Gaiam to cancel, effective December 31, 2012, the $3 per
square foot credit set forth in the then current lease. On April 23, 2013, Gaiam converted $100,000 of the then outstanding $2.7 million into 62,111 shares of the Companys Class A common stock. The $2.6 million remaining amount due
to Gaiam was repaid on November 5, 2013; $2.1 million in cash, $200,000 of tenant improvements transferred to Gaiam and a discount for early repayment of $300,000. The discount is included in other accrued liabilities to reflect the above
market lease with Gaiam for the Companys headquarters office space.
The $1.0 million promissory note entered into with Riverside during
December 2012 included certain customary language making the loan payable upon the occurrence of certain events, such as insolvency or bankruptcy. Also, if the Company completes a sale of at least $50,000 of capital stock, then Riverside has the
option of converting all or any portion of the principal and interest owing on the loan in question into securities in such sale at the same purchase price as paid by other purchasers in such sale. If RGS fails to make payment of the principal and
all interest owing the loan within 10 days of when due, Riverside has the option to acquire an undivided 50% interest in our real property located in Hopland, California (including all land and buildings) in exchange for cancellation of such
40
principal and interest. This option is conditioned upon (1) the approval of the transaction by the Companys disinterested directors, and (2) the consent of the Companys
senior creditor, Silicon Valley Bank. The loans are unsecured and subordinated to the Companys indebtedness to unaffiliated creditors. Subject to the rights of senior debt, RGS has the right to prepay the loans at any time without premium or
penalty.
Accrued interest on related party debt is $664,000 and $200,000 at December 31, 2013 and 2012, respectively, and is reported in accrued
liabilities on the consolidated balance sheet.
Riverside owns approximately 22% of the Companys currently outstanding Class A common stock and
is one of its creditors. Pursuant to the terms of a Shareholders Agreement, Riverside has the right to designate a certain number of individuals for appointment or nomination to the Board of Directors, tied to its respective ownership of the
Companys Class A common stock.
9. Commitments and Contingencies
The Company leases office and warehouse space through operating leases. Some of the leases have renewal clauses, which range from three to
five years. On December 19, 2011, RGS entered into a five year facility lease with Gaiam, for office space located in a Gaiam-owned building in Colorado. The lease commenced on January 1, 2012 and provides for monthly payment of
approximately $21,832.
The following schedule represents the annual future minimum payments of all leases:
|
|
|
|
|
(in thousands)
|
|
At December 31,
2013
|
|
2014
|
|
$
|
747
|
|
2015
|
|
|
566
|
|
2016
|
|
|
200
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
1,513
|
|
|
|
|
|
|
The Company incurred rent expense of $1.3 million, $0.9 million and $0.5 million for the years ended December 31, 2013,
2012 and 2011, 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 that may be incurred with respect to
identified risks and uncertainties based upon the facts and circumstances currently available. Due to uncertainties in the estimation process, actual costs could vary from the amounts accrued.
10. Shareholders Equity
During 2013, the Company issued 18,517 shares of its Class A common stock under the Real Goods Solar, Inc. 2008 Long-Term Incentive
Plan (2008 Incentive Plan) to certain of its independent directors, in lieu of cash compensation, for services rendered during 2013.
On
November 15, 2013, RGS issued 5.9 million shares of its Class A common stock and received proceeds of $18.4 million. As part of the offering, RGS issued warrants to purchase 5.0 million shares of its Class A common stock at
$3.41 per share, which expire May 15, 2019.
On June 3, 2013, RGS issued 3.4 million shares of its Class A common stock and received proceeds of $8.4
million. As part of the offering, RGS issued warrants to purchase 1.7 million shares of its Class A common stock at $2.60 per share, which expire June 3, 2018. The exercise price was reduced to $2.50 per share in conjunction with the November 15,
2013 issuance of shares and warrants. Certain anti-dilution protection provisions contained in the warrants were triggered. Such provisions required the exercise price of the warrants to be reduced and the number of shares of Common Stock issuable
upon exercise of the warrants to increase, based on the formula and on the terms set forth in the warrants after taking into account the Black Scholes and fair market values of the warrants and such anti-dilution protection provisions.
During 2012, the Company issued 33,056 shares of its Class A common stock under the 2008 Incentive Plan to certain of its independent directors, in lieu
of cash compensation, for services rendered during 2012.
At December 31, 2013, RGS had the following shares of Class A common stock reserved for
future issuance:
|
|
|
|
|
Stock options under the our incentive plans
|
|
|
1,995,210
|
|
Stock options under plans not approved by security holders
|
|
|
300,000
|
|
Warrants outstanding
|
|
|
6,670,103
|
|
|
|
|
|
|
Total shares reserved for future issuance
|
|
|
8,965,313
|
|
|
|
|
|
|
41
Each holder of the Companys Class A common stock is entitled to one vote for each share held on all
matters submitted to a vote of shareholders. On December 31, 2011, Gaiam converted all of its holdings of the Companys Class B common stock to Class A common stock and, as a result, RGS has had no shares of Class B common stock
outstanding since December 31, 2011. Under the terms of the Companys articles of incorporation and merger with Alteris, RGS is prohibited from issuing Class B common stock in the future. All holders of Class A common stock vote as a
single class on all matters that are submitted to the shareholders for a vote. Accordingly, Riverside, as the holder of approximately 22% of the Class A common stock and entitled to vote in any election of directors, may exert significant
influence over the election of the directors. Shareholders with 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 were present and voted may consent to an action
in writing and without a meeting under certain circumstances.
Holders of the Companys Class A 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 Real Goods Solar, Class A common stock holders are entitled to share ratably in the Companys
assets remaining after the payment of all of debts and other liabilities. Holders of Class A common stock have no preemptive, subscription or redemption rights, and there are no redemption or sinking fund provisions applicable to the
Companys Class A common stock.
11. 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. 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.
42
The following tables summarize the basis used to measure certain financial assets and liabilities at fair value
on a recurring basis in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013 (in thousands)
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical
Items
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Common stock warrant liability
|
|
$
|
15,071
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the valuation technique for assets and liabilities measured and recorded at fair value:
Common stock warrant liability: For our level 3 securities, which represent common stock warrants, fair value is based on 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 (See Note 2. Significant Accounting Policies). The Company used a market approach to valuing the derivative
liabilities.
Assets acquired and liabilities assumed, net: For our level 3 assets, which represent assets acquired and liabilities assumed, fair value is
based upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions (See Note 2. Significant Accounting Policies). The Company used a market approach to valuing the assets and
liabilities.
12. Share-Based Compensation
The Companys share-based compensation programs are long-term retention programs that are intended to attract, retain and provide
incentives for talented employees, officers, and directors to align shareholder and employee interests. RGS primarily grants options under its 2008 Incentive Plan, but have also granted 300,000 non-shareholder approved options to its chief executive
officer during 2012.
At December 31, 2013 the Companys 2008 Incentive Plan provides for the granting of options to purchase up to the lesser of
3,000,000 shares of its Class A common stock or 10% of its then outstanding Class A common stock. Furthermore, the Board of Directors has resolved that all types of granted options shall not exceed 10% of the then outstanding Class A
common stock. Both nonqualified stock options and incentive stock options may be issued under the provisions of the 2008 Incentive Plan. Employees, members of the Board of Directors, consultants, business partners, and certain key advisors are
eligible to participate in the 2008 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. All outstanding options are nonqualified and are
generally granted with an exercise price equal to the closing market price of the Companys stock on the date of the grant. Options vest based on 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.
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 Companys 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 RGS industry and its stock price volatility since our 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 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 is used in the option valuation model. RGS is required to estimate
forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. RGS primarily uses plan life to-date forfeiture experience rate of 40% to estimate option forfeitures and records
share-based compensation expense only for those awards that are expected to vest.
43
The following are the variables used in the Black-Scholes option pricing model to determine the estimated grant
date fair value for options granted under the Companys incentive plans for each of the years presented:
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
Expected volatility
|
|
83% - 104%
|
|
76% - 87%
|
|
74% - 88%
|
Weighted-average volatility
|
|
93%
|
|
80%
|
|
81%
|
Expected dividends
|
|
%
|
|
%
|
|
%
|
Expected term (in years)
|
|
3.8 6.6
|
|
5.0 - 6.6
|
|
5.0 - 6.7
|
Risk-free rate
|
|
0.68% - 2.45%
|
|
0.57% - 1.26%
|
|
1.17% - 2.24%
|
The table below presents a summary of our option activity as of December 31, 2013 and changes during the year then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(Yrs)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2013
|
|
|
1,825,320
|
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
928,000
|
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(117,030)
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(341,080)
|
|
|
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
2,295,210
|
|
|
$
|
1.51
|
|
|
|
5.0
|
|
|
$
|
3,468,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
|
609,090
|
|
|
$
|
2.00
|
|
|
|
2.6
|
|
|
$
|
621,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the years 2013, 2012 and 2011 was $1.13, $0.76 and $1.67,
respectively. The total fair value of shares vested was $305,000, $432,000 and $448,000 during the years ended December 31, 2013, 2012 and 2011, respectively. The Companys share-based compensation cost charged against income was $509,000,
$400,000, and $516,000 during the years 2013, 2012 and 2011, respectively, and is recorded as general and administrative expenses. The total income tax benefit recognized for share-based compensation was $nil, nil and $200,000 for the years ended
December 31, 2013, 2012, and 2011, respectively. As of December 31, 2013, there was $787,230 of unrecognized cost related to nonvested shared-based compensation arrangements granted under the plans. The Company expects that cost to be
recognized over a weighted-average period of 3.3 years.
Subsequent Event
On January 14, 2014, the Companys shareholders approved an amendment to the 2008 Long-Term Incentive Plan. The amendment increases the number of
options available for grant to 6,704,231, which was 15% of the Companys then outstanding Class A common stock.
13. Income Taxes
The Companys provision for income tax expense (benefit) is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
58
|
|
|
|
61
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
61
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
7,361
|
|
|
|
(494)
|
|
State
|
|
|
|
|
|
|
1,298
|
|
|
|
(82)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,659
|
|
|
|
(576)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58
|
|
|
$
|
8,720
|
|
|
$
|
(560)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Variations from the federal statutory rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected federal income tax expense (benefit) at statutory rate of 34%
|
|
$
|
(3,882)
|
|
|
$
|
(13,086)
|
|
|
$
|
(836)
|
|
Effect of permanent goodwill impairment
|
|
|
|
|
|
|
7,898
|
|
|
|
|
|
Effect of permanent acquisition-related differences
|
|
|
|
|
|
|
|
|
|
|
461
|
|
Effect of permanent other differences
|
|
|
136
|
|
|
|
94
|
|
|
|
30
|
|
Effect of carryforward state net operating losses
|
|
|
|
|
|
|
|
|
|
|
(72)
|
|
Effect of valuation allowance
|
|
|
4,559
|
|
|
|
16,074
|
|
|
|
|
|
Other
|
|
|
(48)
|
|
|
|
49
|
|
|
|
(3)
|
|
State income tax expense (benefit), net of federal benefit
|
|
|
(707)
|
|
|
|
(2,309)
|
|
|
|
(140)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
58
|
|
|
$
|
8,720
|
|
|
$
|
(560)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 assets shown on a gross basis as of December 31, 2013 and 2012 are as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2013
|
|
|
2012
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
230
|
|
|
$
|
437
|
|
Inventory-related expense
|
|
|
274
|
|
|
|
469
|
|
Accrued liabilities
|
|
|
1,385
|
|
|
|
1,281
|
|
Net operating loss carryforward
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
$
|
1,889
|
|
|
$
|
2,187
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
775
|
|
|
$
|
613
|
|
Net operating loss carryforward
|
|
|
20,337
|
|
|
|
13,243
|
|
Other
|
|
|
(5)
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
Total non-current deferred tax assets
|
|
$
|
21,107
|
|
|
$
|
13,887
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(22,996)
|
|
|
|
(16,074)
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013, RGS had $15.7 million of federal net operating loss carryforwards expiring, if not utilized,
beginning in 2020. Additionally, the Company had $4.6 million of state net operating loss carryforwards expiring, it not utilized, beginning in 2019.
Utilization of the net operating loss carry forwards may be subject to annual limitation under applicable federal and state ownership change limitations and,
accordingly, net operating losses may expire before utilization. The company completed a Section 382 analysis through December 2013 and determined that an ownership change, as defined under Section 382 of the Internal Revenue Code occurred
in prior years. The net operating loss carryforwards above have accounted for any limited and potential loss attributes to such ownership changes.
At
December 31, 2013, the Company had no amount of unrecognized tax benefits. The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized benefits will increase or decrease within 12
months of the year ended December 31, 2013.
As a result of the net operating losses, substantially all of its federal, state and local income tax
returns are subject to audit.
The Companys valuation allowance increased by approximately $6.9 million for the year ended December 31, 2013 as
a result of its operating loss for the year. The valuation allowance was determined in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both negative and positive evidence when measuring the need for a
valuation allowance. Based upon the available objective evidence and the Companys history of losses, management believes it is more likely than not that the net deferred tax assets will not be realized. At December 31, 2013, the Company
has a valuation allowance against its deferred tax assets net of the expected income from the reversal of its deferred tax liabilities.
The Company is
required, under the terms of its tax sharing agreement with Gaiam, to distribute to Gaiam 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,
2013, utilizing an income tax rate of 35%, the Company estimates that the maximum amount of such distributions to Gaiam could aggregate $1.6 million.
45
14. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
Fiscal Year 2013 Quarters Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30 (a)
|
|
|
December 31 (b)
|
|
Net revenue
|
|
$
|
16,793
|
|
|
$
|
20,666
|
|
|
$
|
33,983
|
|
|
$
|
29,900
|
|
Gross profit
|
|
|
4,592
|
|
|
|
4,768
|
|
|
|
7,261
|
|
|
|
5,689
|
|
Loss before income taxes
|
|
|
(3,793)
|
|
|
|
(2,908)
|
|
|
|
(2,086)
|
|
|
|
(2,447)
|
|
Net loss
|
|
|
(3,793)
|
|
|
|
(2,908)
|
|
|
|
(2,094)
|
|
|
|
(2,505)
|
|
Diluted net loss per share
|
|
$
|
(0.14)
|
|
|
$
|
(0.11)
|
|
|
$
|
(0.07)
|
|
|
$
|
(0.08)
|
|
Weighted average shares outstanding-diluted
|
|
|
26,696
|
|
|
|
27,804
|
|
|
|
30,044
|
|
|
|
33,077
|
|
|
|
(in thousands, except per share data)
|
|
Fiscal Year 2012 Quarters Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30 (c)
|
|
|
December 31 (d)
|
|
Net revenue
|
|
$
|
18,256
|
|
|
$
|
21,447
|
|
|
$
|
26,358
|
|
|
$
|
26,830
|
|
Gross profit
|
|
|
6,427
|
|
|
|
5,319
|
|
|
|
5,737
|
|
|
|
5,549
|
|
Income (loss) before income taxes
|
|
|
(3,052)
|
|
|
|
(4,070)
|
|
|
|
(27,549)
|
|
|
|
(3,815)
|
|
Net income (loss)
|
|
|
(1,856)
|
|
|
|
(2,518)
|
|
|
|
(39,017)
|
|
|
|
(3,815)
|
|
Diluted net income (loss) per share
|
|
$
|
(0.07)
|
|
|
$
|
(0.09)
|
|
|
$
|
(1.46)
|
|
|
$
|
(0.14)
|
|
Weighted average shares outstanding-diluted
|
|
|
26,661
|
|
|
|
26,669
|
|
|
|
26,677
|
|
|
|
26,694
|
|
(a)
|
The quarter ended September 30, 2013 includes one-time cash charges of $555,000 for the integration of Syndicated and other acquisition related expenses.
|
(b)
|
The quarter ended December 31, 2013 includes one-time cash charges of $1.5 million for the integration of Syndicated, acquisition of Mercury and other acquisition related expenses.
|
(c)
|
The quarter ended September 30, 2012 includes a noncash charge of $22.0 million for the impairment of goodwill and other assets and a noncash charge of $14.5 million for the establishment of a valuation allowance
for all of our net deferred tax assets.
|
(d)
|
The quarter ended December 31, 2012 includes a noncash charge of $1.6 million for an additional valuation allowance for our net deferred tax assets generated during that quarter.
|
46