United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
Form 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30,
2015
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 001-34044
REAL GOODS
SOLAR, INC.
(Exact name of registrant as specified
in its charter)
COLORADO |
|
26-1851813 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
833 WEST SOUTH BOULDER ROAD
LOUISVILLE, COLORADO 80027-2452
(Address of principal executive offices)
(303) 222-8300
(Registrant’s telephone number,
including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of
the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES
x NO
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES
x NO
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
¨ |
Accelerated filer |
x |
|
|
|
|
Non-accelerated filer |
¨ (Do not check if a smaller reporting company) |
Smaller reporting company |
¨ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
¨ NO
x
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date:
Class |
|
Outstanding at October 30, 2015 |
Class A Common Stock ($.0001 par value) |
|
12,294,407 |
REAL GOODS SOLAR, INC.
FORM 10-Q
INDEX
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This report may contain forward-looking statements that involve
risks and uncertainties. Forward-looking statements are neither historical facts nor assurances of future performance. Instead,
they provide our current beliefs, expectations, assumptions and forecasts about future events, and include statements regarding
our future results of operations and financial position, business strategy, budgets, projected costs, plans and objectives of management
for future operations. The words “anticipate,” “believe,” “plan,” “estimate,” “expect,”
“strive,” “future,” “intend,” “may,” “will” and similar expressions
as they relate to us are intended to identify such forward-looking statements. Because forward-looking statements relate to the
future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of
which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the
forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could
cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include,
without limitation, the following:
the continuation and level of
government subsidies and incentives for solar energy, the impacts of worsening economic conditions on homeowners and small commercial
operation that may limit their ability and desire to invest in solar energy systems, changing and updating technologies and the
issues presented by these new technologies related to customer demand and our product offering, the rates charged by electric
utilities that may impact the desirability of our product to customers, our success in implementing our plans to increase future
sales and revenue by expanding our sales and construction organization and expanding into new states of operations, the impact
of a drop in the price of conventional energy on demand for solar energy systems, new regulations impacting solar installations
including electric codes, access to electric grids, the willingness of electric utilities to allow interconnections and other
regulations affecting energy consumption by consumers, factors impacting the timely installation of systems, seasonality and adverse
weather conditions inhibiting our ability to install solar energy systems, our inability to maintain effective disclosure controls
and procedures and internal control over financial reporting, our ability to operate with our existing financial resources and
capital available under our debt facility, the impact of our present indebtedness and projected future borrowings on our financial
health, our ability to continue to obtain access to financing and financial concessions when needed from financiers, loss of key
personnel and ability to attract necessary personnel, our history of operating losses, our
failure to realize cost savings from restructuring and optimization, geographic concentration of revenue from the sale of solar
energy systems in east coast states, Hawaii and California, our failure to timely or accurately complete financing paperwork behalf
of customers, adverse outcomes arising from litigation and contract disputes, disruption of our supply chain from equipment
manufacturers, construction risks and costs, competition, continued access to competitive third party financiers to finance customer
solar installations, failure by manufacturers of third party installers to perform under their warranties to us, failure of customers
to pay per contractual terms, potential shortages of supplies for solar energy systems,
conditions affecting international trade can have an adverse effect on the supply of solar photovoltaic modules, delays
or cancellations for system installations done on a percentage-of-completion, non-compliance
with NASDAQ continued listing requirements, changing reporting requirements which require significant compliance efforts and resources,
volatile market price of our Class A common stock, lack of coverage of our Class A common stock by securities analysts, the
low likelihood that we will pay any cash dividends on our Class A common stock for the foreseeable
future, possibility of future dilutive issuances of securities, anti-takeover provisions in our organizational documents, the
significant ownership and voting power of our Class A common stock held by Riverside Renewable Energy Investments, LLC (“Riverside”),
the potential impact of the U.S. Securities and Exchange Commission’s investigation, our ability to raise funds to meet
our financial obligations for the next 12 months, and such other factors as discussed throughout Part I, Item 1A, Risk Factors
and Part II, Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations of our
Annual Report on Form 10-K for the year ended December 31, 2014, and Part I, Item 2, Management’s Discussion and
Analysis of Financial Condition and Results of Operations and Part II, Item 1A, Risk Factors included in our Quarterly Report
on Form 10-Q for the quarter ended September 30, 2015.
Any forward-looking statement made by us in this report is based
only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to
publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result
of new information, future developments or otherwise.
PART I – FINANCIAL INFORMATION
Item 1. |
Financial Statements (Unaudited) |
Unaudited Interim Condensed Consolidated Financial Statements
We have prepared our unaudited interim condensed consolidated
financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) have been condensed or omitted pursuant to these rules and regulations, although
we believe that the disclosures made are adequate to make the information not misleading. In our opinion, the unaudited interim
condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly,
in all material respects, our consolidated financial position as of September 30, 2015, the interim results of operations for the
three and nine months ended September 30, 2015 and 2014, and cash flows for the nine months ended September 30, 2015 and 2014.
These interim statements have not been audited. The balance sheet as of December 31, 2014 was derived from our audited consolidated
financial statements included in our annual report on Form 10-K. The interim condensed consolidated financial statements contained
herein should be read in conjunction with our audited financial statements, including the notes thereto, for the year ended December 31,
2014.
REAL GOODS SOLAR, INC.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share data) | |
September 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,241 | | |
$ | 1,947 | |
Accounts receivable, net | |
| 6,704 | | |
| 8,293 | |
Costs in excess of billings | |
| 1,751 | | |
| 2,789 | |
Inventory, net | |
| 2,902 | | |
| 4,639 | |
Deferred costs on uncompleted contracts | |
| 1,020 | | |
| 2,011 | |
Other current assets | |
| 1,119 | | |
| 1,084 | |
Current assets of discontinued operations | |
| 3,238 | | |
| 8,427 | |
| |
| | | |
| | |
Total current assets | |
| 17,975 | | |
| 29,190 | |
Property and equipment, net | |
| 1,247 | | |
| 1,504 | |
Goodwill | |
| 1,338 | | |
| 1,338 | |
Net investment in sales-type leases | |
| 1,221 | | |
| 1,131 | |
Noncurrent assets of discontinued operations | |
| 922 | | |
| 1,082 | |
| |
| | | |
| | |
Total assets | |
$ | 22,703 | | |
$ | 34,245 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Line of credit | |
$ | 2,722 | | |
$ | 4,350 | |
Accounts payable | |
| 7,518 | | |
| 13,398 | |
Accrued liabilities | |
| 1,428 | | |
| 2,978 | |
Billings in excess of costs on uncompleted contracts | |
| 1,448 | | |
| 1,984 | |
Related party debt | |
| — | | |
| 3,150 | |
Deferred revenue and other current liabilities | |
| 1,268 | | |
| 2,752 | |
Current liabilities of discontinued operations | |
| 4,524 | | |
| 7,984 | |
| |
| | | |
| | |
Total current liabilities | |
| 18,908 | | |
| 36,596 | |
Other liabilities | |
| 55 | | |
| 132 | |
Common stock warrant liability | |
| 551 | | |
| 2,491 | |
Noncurrent liabilities of discontinued operations | |
| 225 | | |
| 327 | |
| |
| | | |
| | |
Total liabilities | |
| 19,739 | | |
| 39,546 | |
| |
| | | |
| | |
Commitments and contingencies (Note. 5) | |
| | | |
| | |
Shareholders’ equity: | |
| | | |
| | |
Class A common stock, $.0001 par value, 150,000,000 shares authorized, 12,301,173 and 2,601,284 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively | |
| 8 | | |
| 5 | |
Additional paid-in capital | |
| 156,200 | | |
| 140,124 | |
Business acquisition consideration to be transferred | |
| — | | |
| 1,244 | |
Accumulated deficit | |
| (153,244 | ) | |
| (146,674 | ) |
| |
| | | |
| | |
Total shareholders’ equity (deficit) | |
| 2,964 | | |
| (5,301 | ) |
| |
| | | |
| | |
Total liabilities and shareholders’ equity (deficit) | |
$ | 22,703 | | |
$ | 34,245 | |
See accompanying notes.
REAL GOODS SOLAR, INC.
Condensed Consolidated Statements of Operations
| |
For the Three Months Ended September 30, | | |
For the Nine Months Ended September 30, | |
(in thousands, except per share data) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
(unaudited) | | |
(unaudited) | |
Net revenue | |
$ | 10,438 | | |
$ | 18,900 | | |
$ | 35,775 | | |
$ | 52,302 | |
Cost of goods sold | |
| 8,880 | | |
| 15,706 | | |
| 30,871 | | |
| 41,793 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 1,558 | | |
| 3,194 | | |
| 4,904 | | |
| 10,509 | |
| |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | |
Selling and operating | |
| 3,430 | | |
| 7,010 | | |
| 10,417 | | |
| 19,860 | |
General and administrative | |
| 1,230 | | |
| 2,194 | | |
| 4,100 | | |
| 6,566 | |
Share based compensation | |
| 131 | | |
| 461 | | |
| 531 | | |
| 1,081 | |
Acquisition costs | |
| — | | |
| 59 | | |
| — | | |
| 865 | |
Restructuring costs | |
| 66 | | |
| 355 | | |
| 424 | | |
| 355 | |
Litigation | |
| 1,084 | | |
| — | | |
| 1,584 | | |
| — | |
Depreciation and amortization | |
| 102 | | |
| 999 | | |
| 376 | | |
| 2,183 | |
Goodwill and other asset impairments | |
| — | | |
| 1,365 | | |
| — | | |
| 1,365 | |
| |
| | | |
| | | |
| | | |
| | |
Total expenses | |
| 6,043 | | |
| 12,443 | | |
| 17,432 | | |
| 32,275 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
| (4,485 | ) | |
| (9,249 | ) | |
| (12,528 | ) | |
| (21,766 | ) |
Other income | |
| — | | |
| — | | |
| 147 | | |
| — | |
Interest expense | |
| (54 | ) | |
| (340 | ) | |
| (423 | ) | |
| (795 | ) |
Change in valuation of warrants, net | |
| 660 | | |
| 6,789 | | |
| 6,924 | | |
| 8,204 | |
| |
| | | |
| | | |
| | | |
| | |
Loss before income taxes | |
| (3,879 | ) | |
| (2,800 | ) | |
| (5,880 | ) | |
| (14,357 | ) |
Income tax (expense) benefit | |
| (2 | ) | |
| 287 | | |
| 22 | | |
| 1,496 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations, net of tax | |
| (3,881 | ) | |
| (2,513 | ) | |
| (5,858 | ) | |
| (12,861 | ) |
Loss from discontinued operations, net of tax | |
| (397 | ) | |
| (2,237 | ) | |
| (712 | ) | |
| (28,071 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (4,278 | ) | |
$ | (4,750 | ) | |
$ | (6,570 | ) | |
$ | (40,932 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss per share – basic and diluted: | |
| | | |
| | | |
| | | |
| | |
From continuing operations | |
$ | (0.32 | ) | |
$ | (0.98 | ) | |
$ | (0.87 | ) | |
$ | (5.52 | ) |
From discontinued operations | |
| (0.03 | ) | |
| (0.88 | ) | |
| (0.11 | ) | |
| (12.05 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss per share – basic and diluted | |
$ | (0.35 | ) | |
$ | (1.86 | ) | |
$ | (0.98 | ) | |
$ | (17.57 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted-average shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 12,285 | | |
| 2,553 | | |
| 6,757 | | |
| 2,330 | |
See accompanying notes.
REAL GOODS SOLAR, INC.
Condensed Consolidated Statements of Changes in Equity (unaudited)
| |
Class A Common Stock | | |
Additional | | |
Business Combination Consideration to be | | |
Accumulated | | |
Total Shareholders’ | |
(in thousands, except share data) | |
Shares | | |
Amount | | |
Paid - in Capital | | |
Transferred | | |
Deficit | | |
Equity (Deficit) | |
Balances, January 1, 2015 | |
| 2,601,284 | | |
$ | 5 | | |
$ | 140,124 | | |
$ | 1,244 | | |
$ | (146,674 | ) | |
$ | (5,301 | ) |
Issuance of common stock and other equity changes related to compensation | |
| 14,933 | | |
| | | |
| 531 | | |
| | | |
| | | |
| 531 | |
Proceeds from February 2015 Offering and warrant exercises, net of costs | |
| 3,021,581 | | |
| 3 | | |
| 10,639 | | |
| | | |
| | | |
| 10,642 | |
Proceeds from June 2015 Offering, net of costs | |
| 4,021,884 | | |
| | | |
| 4,408 | | |
| | | |
| | | |
| 4,408 | |
Establishment of liability related to common stock warrant issuance | |
| | | |
| | | |
| (12,246 | ) | |
| | | |
| | | |
| (12,246 | ) |
Adjustment to common stock warrant liability for warrants exercised/extinguished | |
| 1,328,004 | | |
| | | |
| 7,262 | | |
| | | |
| | | |
| 7,262 | |
Related party debt conversion | |
| 1,288,156 | | |
| | | |
| 4,238 | | |
| | | |
| | | |
| 4,238 | |
Business combination consideration | |
| 22,631 | | |
| | | |
| 1,244 | | |
| (1,244 | ) | |
| | | |
| — | |
Fractional shares issued in connection with reverse split | |
| 2,700 | | |
| | | |
| | | |
| | | |
| | | |
| - | |
Net loss | |
| | | |
| | | |
| | | |
| | | |
| (6,570 | ) | |
| (6,570 | ) |
Balances, September 30, 2015 | |
| 12,301,173 | | |
$ | 8 | | |
$ | 156,200 | | |
$ | — | | |
$ | (153,244 | ) | |
$ | 2,964 | |
REAL GOODS SOLAR, INC.
Condensed Consolidated Statements of Cash Flows
| |
For the Nine Months Ended September 30, (unaudited) | |
(in thousands except share data) | |
2015 | | |
2014 | |
Operating activities | |
| | | |
| | |
Net loss | |
$ | (6,570 | ) | |
$ | (40,932 | ) |
Loss from discontinued operations | |
| (712 | ) | |
| (28,071 | ) |
Loss from continuing operations | |
| (5,858 | ) | |
| (12,861 | ) |
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities – continuing operations: | |
| | | |
| | |
Depreciation | |
| 376 | | |
| 394 | |
Amortization | |
| — | | |
| 1,789 | |
Share-based compensation | |
| 531 | | |
| 1,082 | |
Change in valuation of warrants, net | |
| (6,924 | ) | |
| (8,204 | ) |
Asset impairments | |
| — | | |
| 1,365 | |
Loss (gain) on sale of assets | |
| (160 | ) | |
| — | |
Other | |
| — | | |
| 117 | |
Deferred income tax benefit | |
| — | | |
| (1,214 | ) |
Deferred interest on related party debt | |
| — | | |
| 406 | |
Bad debt expense | |
| 165 | | |
| 357 | |
Changes in operating assets and liabilities, net of effects from acquisitions: | |
| | | |
| | |
Accounts receivable, net | |
| 1,868 | | |
| (1,496 | ) |
Costs in excess of billings on uncompleted contracts | |
| 1,174 | | |
| 2,590 | |
Inventory, net | |
| 1,737 | | |
| (7 | ) |
Deferred costs on uncompleted contracts | |
| 991 | | |
| (3,543 | ) |
Net investment in sales-type leases | |
| (90 | ) | |
| (593 | ) |
Other current assets | |
| (35 | ) | |
| (29 | ) |
Accounts payable | |
| (6,324 | ) | |
| 4,736 | |
Accrued liabilities | |
| (588 | ) | |
| (184 | ) |
Billings in excess of costs on uncompleted contracts | |
| (536 | ) | |
| 1,306 | |
Deferred revenue and other current liabilities | |
| (1,484 | ) | |
| 347 | |
Other liabilities | |
| (77 | ) | |
| 676 | |
| |
| | | |
| | |
Net cash used in operating activities – continuing operations | |
| (15,234 | ) | |
| (12,966 | ) |
Net cash provided by (used in) operating activities – discontinued operations | |
| 1,075 | | |
| (18,333 | ) |
| |
| | | |
| | |
Net cash used in operating activities | |
| (14,159 | ) | |
| (31,299 | ) |
| |
| | | |
| | |
Investing activities | |
| | | |
| | |
Cash from acquired businesses | |
| — | | |
| 11,958 | |
Purchase of property and equipment | |
| (150 | ) | |
| (304 | ) |
Proceeds from sale of property and equipment | |
| 181 | | |
| 249 | |
| |
| | | |
| | |
Net cash provided by investing activities | |
| 31 | | |
| 11,903 | |
| |
| | | |
| | |
Financing activities | |
| | | |
| | |
Principal borrowings on revolving line of credit | |
| 39,688 | | |
| 13,600 | |
Principal payments on revolving line of credit | |
| (41,316 | ) | |
| (8,834 | ) |
Principal payments on related party debt | |
| — | | |
| (1,000 | ) |
Principal payments on debt | |
| — | | |
| (2000 | ) |
Proceeds from sale of common stock and warrant exercises, net of costs | |
| 15,050 | | |
| 6,813 | |
Exercise of stock options | |
| — | | |
| 137 | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 13,422 | | |
| 8,716 | |
| |
| | | |
| | |
Net change in cash | |
| (706 | ) | |
| (10,680 | ) |
Cash and cash equivalents at beginning of period | |
| 1,947 | | |
| 12,449 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 1,241 | | |
$ | 1,769 | |
| |
| | | |
| | |
Supplemental cash flow information | |
| | | |
| | |
Income taxes paid | |
$ | 19 | | |
$ | 6 | |
Interest paid | |
$ | 212 | | |
$ | 427 | |
Non-cash items | |
| | | |
| | |
Issuance of 567,731 shares of Class A common stock in conjunction with the acquisition of businesses | |
$ | — | | |
$ | 37,697 | |
Change in common stock warrant liability in conjunction with exercise of 8,363 warrants | |
$ | — | | |
$ | 621 | |
Common stock warrant liability recorded in conjunction with equity funding | |
$ | 12,246 | | |
$ | 1,957 | |
Issuance of Class A common stock to related party for conversion of subordinated debt and accrued interest | |
$ | 4,238 | | |
$ | — | |
Consideration transferred to Elemental Energy LLC | |
$ | 1,244 | | |
$ | — | |
Change in common stock warrant liability in conjunction with exercise/extinguishment of warrants | |
$ | 7,262 | | |
$ | — | |
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
1. Organization, Nature of Operations, and Principles of
Consolidation
Real Goods Solar, Inc. (the “Company” or “RGS”)
is a residential and small commercial solar energy engineering, procurement, and construction firm.
Discontinued Operations
During 2014, the Company committed to a strategic shift of its
business resulting in a plan to sell certain net assets and rights, and the attrition of substantially completed contracts over
the following twelve months comprising its large commercial installations business. Accordingly, the assets and liabilities, operating
results, and operating and investing activities cash flows for the large commercial segment are presented as a discontinued operation,
separate from the Company’s continuing operations, for all periods presented in these condensed consolidated financial statements
and footnotes, unless indicated otherwise. See Note 11. Discontinued Operations.
Liquidity and Financial Resources Update
The following conditions or events have been evaluated by management:
(i) the U.S Securities and Exchange Commission subpoena initially disclosed as a Risk Factor in the Company’s second quarter
report on Form 10-Q and subsequently updated in this quarter’s Form 10-Q which identified, among other matters, that the
Company would be subject to material legal expenses, (ii) the Company incurred material legal expenses during the third quarter
and, its insurance carrier has denied reimbursement, (iii) the Company requires additional funds to implement its plans to grow
its sales and construction capabilities, and (iv) the Company’s lender has waived the covenant default (see Note 3. Revolving
Line of Credit) and amended the SVB Loan (defined below) to replace an EBITDA-based covenant with a liquidity convenant. To increase
liquidity, the Company could sell assets, materially reduce operating costs and seek extended terms for its obligations; however,
such actions, should they be successful, would adversely impact future operating results. In evaluating these conditions and events
in the aggregate, management determined that in order to continue its plan to increase its sales and construction capabilities,
meet its obligations for the next twelve months, and also to comply with the liquidity covenant of the amended SVB Loan, it is
necessary that the Company raise additional capital. The Company has engaged an investment-banking firm to assist the Company with
raising additional capital, expected to occur before November 30, 2015. Although management believes that it has demonstrated track
record of raising capital, no assurances can be given that it will be successful in raising such capital or in sufficient amounts.
If additional capital was not raised, the Company would be required to curtail its plans to expand its sales and construction capabilities
and instead materially reduce operating expenses, dispose of assets, as well as seek extended terms on its obligations, the effect
of which would adversely impact future operating results. No assurances can be given that the Company would be successful in reducing
its operating expenses, disposing of assets or seeking extended terms on its obligations.
In recent years, the Company has reported recurring operating
losses and negative cash from operations, resulting in not paying vendors on a timely basis. To address these circumstances, the
Company has taken actions designed to position the Company to improve its financial condition and to operate profitably in the
future including (i) exiting the large commercial segment, which was operating at a significant operating and cash flow loss, (ii)
reducing its operating cost infrastructure through reductions in its workforce and implementing new commission and marketing spend
programs, (iii) arranging for new capital with its June 2015 Offering and the February 2015 Offering of Class A common stock and
warrants resulting in aggregate of approximately $16.5 million and its planned offering during the fourth quarter of 2015 (see
Note 12. Subsequent Events), (collectively, the “2015 Offerings”), and (iv) converting the Company’s subordinated
debt to equity. However, if following the planned offering during the fourth quarter of 2015, operational and sales initiatives
are not successful in significantly reducing historical losses from operations, the Company may not have sufficient funds to repay
any outstanding borrowings as they come due or to fund its operating cash needs for the next twelve months. Such a situation would
likely arise if the Company (i) is unsuccessful in its efforts to increase its sales and resulting revenue, (ii) encounters unplanned
operational difficulties or (iii) the timing of collection of accounts receivable and payments of accounts payable are significantly
different than anticipated. If these circumstances arise the Company would be required to either (i) materially reduce its operating
costs, or (ii) obtain financing from another source or raise additional capital through debt or equity financing, in addition to
the offering planned for the fourth quarter of 2015. While the Company has been successful in the past in obtaining new financing,
there is no assurance that it will be able to raise additional funds in the future.
The Company has used, and will continue to use, a portion of
the proceeds from the 2015 Offerings, to reduce its accounts payable which has resulted in the reported cash outflow from operations
for the nine months ended September 30, 2015.
The Company has prepared its business plan for 2015, taking
into account (i) the proceeds from the 2015 Offerings, (ii) anticipated timing of vendor payments for existing accounts payable
and for new solar panels, (iii) anticipated timing for sales and installation of solar energy systems, (iv) anticipated timing
of collection of accounts receivable, and (v) its operating cost structure following the implementation of cost improvement actions.
The Company’s objectives in preparing this plan included (i) further reducing its fixed operating cost infrastructure,
commencing during the first quarter of 2015, in order to reduce the required level of future revenue for profitable operations
and (ii) reducing the Company’s present operating losses, with the intention of returning the Company to profitable
operations in the future. Elements of this plan include, among others, (i) realizing operating costs savings from reductions
in staff, (ii) the positive impact of the strategic decision to exit the large commercial segment which operated at both a
substantial cash and operating loss, (iii) moving towards an optimized field and e-sales force, (iv) optimizing the Company’s
construction capability through authorized third-party integrators to realize the revenue from installation of the Company’s
backlog and minimize the impact on gross margin of idle construction crew time, (v) changing the mix of marketing expenditures
to achieve a lower cost of acquisition than that employed in prior periods, and (vi) continuing internal efforts to convert
the Company’s accounts receivable to cash more quickly.
The Company believes that by (i) raising additional capital
through the 2015 Offerings, and (ii) taking the actions it has already and will continue to implement to reduce its fixed
operating cost infrastructure, the Company will have sufficient financial resources to operate for the ensuing twelve months. However,
if the Company is unsuccessful in raising additional capital and if planned operational and sales initiatives are not successful
in significantly reducing historical loss from operations, which would arise were the Company unsuccessful in its efforts to increase
its sales, installations of solar energy systems and resulting revenue or if the Company encounters unplanned operational difficulties,
or if the timing of collection of accounts receivable and payments of accounts payable are significantly different than anticipated,
the Company may not have sufficient funds to repay any outstanding borrowings as they come due or to fund our operating cash needs
for the next twelve months.
The Company had total cash and available borrowings as follows:
(in thousands) | |
October 30, 2015 | | |
September 30, 2015 | | |
December 31, 2014 | |
Cash plus availability under current borrowing base | |
$ | 886 | | |
$ | 1,090 | | |
$ | 3,001 | |
Cash plus availability under maximum allowed borrowing base | |
$ | 3,736 | | |
$ | 3,519 | | |
$ | 3,097 | |
2. Significant Accounting Policies
The Company made no changes to its significant accounting policies
during the nine months ended September 30, 2015.
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company’s management in accordance with GAAP for interim financial information and in
compliance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, these unaudited consolidated
financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In
the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation
have been included. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative
of the expected results for the year ending December 31, 2015. These unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 2014. Intercompany balances and transactions have been eliminated.
Use of Estimates and Reclassifications
The preparation of the condensed consolidated financial statements
in accordance with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. The Company bases its estimates on historical experience and on various
other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results could differ materially from those estimates.
Certain amounts in the 2014 financial statements have been reclassified
to conform to the current year presentation.
Common Stock Warrant Liability
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 liabilities or as equity instruments depending on the specific terms
of the warrant agreement. Certain of the Company’s warrants are accounted for as liabilities due to provisions either allowing
the warrant holder to request redemption, at the intrinsic value of the warrant, upon a change of control and/or providing for
an adjustment to the number of shares of the Company’s Class A common stock underlying the warrants and the exercise
price in connection with dilutive future funding transactions. The Company classifies these derivative liabilities on the Condensed
Consolidated Balance Sheet as long term liabilities, which are revalued at each balance sheet date subsequent to their initial
issuance. The Company used a Monte Carlo pricing model to value these 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.
The following table reflects original assumptions for common
stock warrant liability issued in the first quarter of 2015.
Date of issuance | |
Exercise Price | | |
Closing Market Price | | |
Risk-free Rate | | |
Market Price Volatility | | |
Remaining Term (years) | | |
Expected dividend yield | | |
Probability of change in control | |
February 26, 2015 | |
$ | 0.50 | | |
$ | 0.45 | | |
| 1.62 | % | |
| 102.5 | % | |
| 5.50 | | |
| 0.0 | % | |
| 15.0 | % |
March 17-31, 2015 | |
| variable | | |
$ | 0.45 | | |
| 0.03 | % | |
| 190.0 | % | |
| 0.21 | | |
| 0.0 | % | |
| NA | |
The following table reflects assumptions for common stock warrants
liability outstanding as of September 30, 2015:
Date of issuance | |
Exercise Price | | |
Closing Market Price | | |
Risk-free Rate | | |
Market Price Volatility | | |
Remaining Term (years) | | |
Expected dividend yield | | |
Probability of change in control | |
June 3, 2013 | |
$ | 11.20 | | |
$ | 1.18 | | |
| 0.78 | % | |
| 130.0 | % | |
| 2.68 | | |
| 0.0 | % | |
| 15.0 | % |
November 15, 2013 | |
$ | 68.20 | | |
$ | 1.18 | | |
| 1.03 | % | |
| 130.0 | % | |
| 3.63 | | |
| 0.0 | % | |
| 15.0 | % |
July 9, 2014 | |
$ | 63.80 | | |
$ | 1.18 | | |
| 1.15 | % | |
| 120.0 | % | |
| 4.28 | | |
| 0.0 | % | |
| 15.0 | % |
November 18, 2014 | |
$ | 16.20 | | |
$ | 1.18 | | |
| 1.56 | % | |
| 107.0 | % | |
| 6.14 | | |
| 0.0 | % | |
| NA | |
February 26, 2015 | |
$ | 1.24 | | |
$ | 1.18 | | |
| 1.35 | % | |
| 113.7 | % | |
| 4.90 | | |
| 0.0 | % | |
| 15.0 | % |
March 17-31, 2015 | |
| variable | | |
$ | 1.18 | | |
| 0.14 | % | |
| 138.4 | % | |
| 0.6 | | |
| 0.0 | % | |
| NA | |
Warrants issued in connection with the June 2015 Offering did
not have the attributes which would require them to be recorded as derivative liabilities.
To reflect changes in the fair values of its outstanding warrants
the Company recorded to its common stock warrant liability, net noncash decreases of $0.5 million and $6.8 million during
the three months ended September 30, 2015 and 2014, respectively and noncash decreases of $6.7 million and $8.2 million during
the nine months ended September 30, 2015 and 2014, respectively. In the event warrants are exercised or expire without being exercised,
the fair value is reduced by the number of warrants exercised or expired multiplied by the fair value of each warrant at the time
of exercise or expiration, with a credit to additional paid-in capital.
The table below summarizes the Company’s derivative warrant
activity, adjusted to reflect the one-for-twenty reverse stock split on May 18, 2015 for the nine months ended September 30, 2015:
| |
2013 & 2014 Issuances | | |
2015 Issuances | | |
Total | |
Warrants outstanding at December 31, 2014 | |
| 406,736 | | |
| - | | |
| 406,736 | |
Issuances | |
| - | | |
| 4,174,681 | | |
| 4,174,681 | |
Anti-dilution adjustments | |
| 256,452 | | |
| - | | |
| 256,452 | |
Exchanged for common stock | |
| - | | |
| (1,147,805 | ) | |
| (1,147,805 | ) |
Exercised/extinguished | |
| (17,298 | ) | |
| (2,789,709 | ) | |
| (2,807,007 | ) |
Warrants outstanding at September 30, 2015 | |
| 645,890 | | |
| 237,167 | | |
| 883,057 | |
| |
2013 & 2014 Issuances | | |
2015 Issuances | | |
Total | |
Value of warrants at December 31, 2014 | |
$ | 2,491 | | |
$ | - | | |
$ | 2,491 | |
Value of warrants issued | |
| - | | |
| 12,246 | | |
| 12,246 | |
Adjustment for warrants exercised/extinguished | |
| (3 | ) | |
| (7,259 | ) | |
| (7,262 | ) |
Changes in fair value, net | |
| (2,153 | ) | |
| (4,771 | ) | |
| (6,924 | ) |
Value of warrants at September 30, 2015 | |
$ | 335 | | |
$ | 216 | | |
$ | 551 | |
Certain of the warrants also give the holder the right to require
the Company to redeem the warrant for the then fair value of the warrant in the event of a change in control (the “Put Option
Component”). The Company used 10,000 simulations in the Monte Carlo pricing model to value the warrants and the Put Option
Component. 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 consolidated statement of operations
as change in fair value of warrant liability, with an offsetting non-cash entry recorded as an adjustment to the warrant liability.
Fair Value Measurement
ASC 820, Fair Value Measurements,
clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should
be determined based on assumptions that market participants would use in pricing an asset or a liability.
ASC 820 requires that the valuation
techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820
establishes a three-tier fair value hierarchy, which prioritizes inputs that may be used to measure fair value as follows:
|
• |
|
Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets. |
|
• |
|
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
• |
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
When determining the fair value measurements for assets or liabilities
required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market
in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When
possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in
active markets, the Company looks to market observable data for similar assets.
The following tables 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 September 30, 2015 (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 | |
$ | 551 | | |
$ | — | | |
$ | — | | |
$ | 551 | |
For the Company’s Level 3 measures, which represent common
stock warrants, fair value is based on a Monte Carlo pricing model that is based, in part, upon unobservable inputs for which there
is little or no market data, requiring the Company to develop its own. The Company used a market approach to valuing these derivative
liabilities.
The following table shows the reconciliation from the beginning
to the ending balance for the Company’s common stock warrant liability measured at fair value on a recurring basis using
significant unobservable inputs (i.e. Level 3) for the nine months ended September 30, 2015:
(in thousands) | |
Fair Value Measurements Using Significant Unobservable Inputs | |
Fair value of common stock warrant liability at December 31, 2014 | |
$ | 2,491 | |
Issuance of common stock warrants | |
| 12,246 | |
Change in the fair value of common stock warrant liability, net | |
| (6,924 | ) |
Adjustment for warrants exercised/extinguished | |
| (7,262 | ) |
| |
| | |
Fair value of common stock warrant liability at September 30, 2015 | |
$ | 551 | |
Recently Issued Accounting Standards
ASU 2015-11
On July 22, 2015, the FASB issued Accounting Standards Update
No. 2015-11 (“ASU 2015-11”), Simplifying the Measurement of Inventory, which requires the Company to measure
most inventory “at the lower of cost or net realizable value,” which is the ordinary selling price less any completion,
transportation and disposal costs. The ASU will not apply to inventories that are measured by using either the last-in, first-out
(LIFO) method or the retail inventory method (RIM). The Company is assessing the impact of ASU 2015-11 on its consolidated financial
statements.
ASU 2015-03
On April 7, 2015, the FASB issued Accounting Standards Update
No. 2015-03 (“ASU 2015-03”), Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance
costs to be presented in the balance sheet as a direct deduction from the associated debt liability. For public business entities,
the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods
within those fiscal years. For all other entities, the standard is effective for financial statements issued for fiscal years beginning
after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted
for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. The Company
is assessing the impact of ASU 2015-03 on its consolidated financial statements.
ASU 2015-01
On February 18, 2015, the FASB issued Accounting Standards Update
No. 2015-01 (“ASU 2014-01”), Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). The standard
eliminates the concept of extraordinary item. The standard is effective for financial statements issued for fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years, however early adoption is permitted. The Company is assessing
the impact of ASU 2015-01 on its consolidated financial statements.
ASU 2014-15
On August 27, 2014, the FASB issued Accounting Standards
Update No. 2014-15 (“ASU 2014-15”), Presentation of Financial Statements – Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 is intended to define
management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue
as a going concern and to provide related footnote disclosures.
Under GAAP, financial statements are prepared with the presumption
that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting
under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting
is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.
Currently, GAAP lacks guidance about management’s responsibility
to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide
related footnote disclosures. ASU 2014-15 provides guidance to an organization’s management, with principles and definitions
that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today
in the financial statement footnotes.
The amendments in ASU 2014-15 are effective for the Company
on January 1, 2017, with early application permitted for unissued financial statements. The Company is assessing the impact
of ASU 2014-15 on its consolidated financial statements.
ASU 2014-09
On May 28, 2014, the FASB issued Accounting Standards Update
No. 2014-09 (“ASU 2014-09”), which created Topic 606, Revenue From Contracts With Customers (“Topic
606”) and superseded the revenue recognition requirements in Topic 605, Revenue Recognition, including most
industry-specific revenue recognition guidance. In addition, ASU 2014-09 superseded the cost guidance in Subtopic 605-35, Revenue
Recognition—Construction-Type and Production-Type Contracts, and created new Subtopic 340-40, Other Assets
and Deferred Costs—Contracts with Customers. In summary, the core principle of Topic 606 is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services.
The amendments in ASU 2014-09 are effective for the Company
on January 1, 2017. The Company is assessing the impact of ASU 2014-09 on its consolidated financial statements.
3. Revolving Line of Credit
Under a loan agreement, as amended (the “SVB Loan”),
with Silicon Valley Bank, the Company has a revolving line of credit that provides for advances not to exceed $5.0 million based
upon a borrowing base availability of 75% of eligible accounts receivable as defined in the SVB Loan. Borrowings bear interest
at the greater of (a) the greater of the bank’s prime rate or 4.00%, plus 4.00%, and (b) 8.00%. The amended maturity
date for the SVB Loan is currently March 15, 2016. 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. The Company may reserve up to $500,000
for stand-by letters of credit under the line of credit. The SVB Loan contains various covenants, including a covenant requiring
compliance with a liquidity ratio. As of September 30, 2015 and December 31, 2014, the Company had a line of credit outstanding
of $2.7 million and $4.4 million, respectively, accruing interest at 8% per annum as of September 30, 2015.
On November 6, 2015, the parties to the SVB Loan entered
into the Tenth Loan Modification and Waiver Agreement (the “Tenth Modification Agreement”) pursuant to which Silicon
Valley Bank waived non-compliance as of September 30, 2015 with the EBITDA-based financial covenant in the SVB Loan and the
parties agreed to certain amendments. The Tenth Modification Agreement (i) eliminated the EBITDA-based financial covenant as of
November 6, 2015 and (ii) replaced it with a liquidity covenant to be met at all times after November 30, 2015 of $2.5 million
in the aggregate of Company cash in SVB accounts and availability under the SVB Loan. See Note 12. Subsequent Events.
4. Related Party Transactions
On June 24, 2015, the Company
entered into a Conversion Agreement (the “Conversion Agreement”) with Riverside Fund III, L.P. (“Riverside Lender”),
an entity affiliated with Riverside, to convert notes payable with a principal balance of $3.15 million plus accrued interest of
$1.1 million into 1,288,156 shares of the Company’s Class A common stock using a conversion ratio equal to $3.29 per
share; the closing price of the Class A common stock on June 23, 2015 (the “Conversion”). The shares of Class A common
stock were subsequently issued to Riverside in full satisfaction of the outstanding principal and accrued interest.
Pursuant to the Conversion Agreement,
on August 10, 2015, the Company filed a registration statement on Form S-3 to register for resale the shares of Class A common
stock issued in the Conversion and any shares of Class A common stock held by the Riverside Lender’s affiliates. On August
20, 2015, the U.S. Securities and Exchange Commission declared the registration statement effective.
Riverside is currently the Company’s largest shareholder
and holds approximately 13.7% of the Company’s issued and outstanding shares of Class A common stock as of September 30,
2015. 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 the Company’s Class A common stock.
5. Commitments and Contingencies
The Company leases offices and warehouse space through non-cancelable
operating leases. Some of these leases contain escalation clauses, based on increases in property taxes and building operating
costs, and renewal options ranging from one month to five years.
The Company also leases a fleet of vehicles classified as operating
leases. The lease terms range from 36 to 60 months.
The following schedule represents the remaining future minimum
payments of all leases as of September 30, 2015:
(in thousands) | |
| |
2015 | |
$ | 237 | |
2016 | |
| 773 | |
2017 | |
| 187 | |
2018 and thereafter | |
| 99 | |
| |
| | |
| |
$ | 1,296 | |
The Company incurred rent expense of $0.2 million and $0.4 million
for the three months ended September 30, 2015 and 2014, respectively; and $0.8 million and
$1.0 million for the nine months ended September 30, 2015 and 2014, 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 costs incurred with respect to
identified risks and uncertainties based upon the facts and circumstances currently available.
From time to time, we are involved in legal proceedings that
we consider to be in the normal course of business.
On July 9, 2014, the Company completed a PIPE offering
of approximately $7.0 million at a price per share of $48.00 ($2.40 pre-reverse split). Subsequently, the Company’s stock
price has declined to $1.18 as of September 30, 2015 and four of the investors that participated in the offering (out of approximately
20 total investors that participated in the offering) have asserted claims against the Company in three separate lawsuits alleging
certain misrepresentations and omissions in the offering. Effective July 15, 2015 the Company settled with the four investors.
The Company recorded a charge to operations of $0.5 million as of June 30, 2015, in recognition of the loss contingency for the
July 2014 PIPE offering. That charge was equal to the retention under the Company’s 2014-15 Officers and Directors liability
insurance policy as the Company expects the insurance policy will cover any future claims in excess of the retention limit.
On June 29, 2015, the Company received a subpoena from
the U.S. Securities and Exchange Commission requesting the production of documents, records and information related to an investigation
into the Company’s July 2014 PIPE offering. The Company believes that it has complied fully with all applicable laws,
rules and regulations, and has been cooperating fully with the government’s investigation. The Company has established a
special committee of the board of directors to review the facts and circumstances surrounding the PIPE offering and engaged outside
counsel to assist it with its review. As a result, the Company has incurred related litigation expenses of $1.1 million which
are shown on the Condensed Consolidated Statements of Operations for quarter ended September 30, 2015. These legal expenses contributed
to the Company not meeting the EBITDA covenant under the SVB Loan. The Company and its legal advisors believe its expenses in responding
to the U.S. Securities and Exchange Commission subpoena, which were incurred after June 30, 2015, should be fully paid by its insurance
carrier as they are directly related to the July 2014 PIPE Offering and the Company reached its retention limit for that event
during the second quarter of 2015. However, the insurance carrier has denied coverage for these expenses on the grounds that the
U.S. Securities and Exchange Commission subpoena does not constitute a “claim” covered by the policy. The Company vigorously
disputes the position of its insurance carrier and will continue to pursue coverage of its legal expenses in this matter. However,
as any recovery the Company would receive in the future is a gain contingency, no assurances can be made that its insurance carrier
will, ultimately pay for or reimburse these expenses, or any portion of these expenses.
At this time, the Company is unable
to determine the potential impact, if any, that will result from this investigation. If the Company, its officers or its directors
are deemed to have violated the securities laws, the U.S. Securities and Exchange Commission may seek various remedies against
them.
An authorized integrator currently
owing a net of approximately $0.6 million advised the Company on November 5, 2015 that its business will be reorganized due to
financial difficulties and that they intend to repay the Company as originally agreed. The Company has not recorded an allowance
for doubtful accounts as it has not determined it is probable that a loss has occurred.
6. Shareholders’ Equity
The following transactions were completed
during the nine months ended September 30, 2015:
June 2015 Offering
On June 26, 2015, the Company
closed an offering of $5 million of units, each consisting of one share of Class A common stock and one Series F warrant to purchase
30% of one share of Class A common stock (the “June 2015 Offering”). The Company sold the units at an initial purchase
price of $3.65 per unit with a one-time reset adjustment of (i) the number of shares of Class A common stock, and (ii) the exercise
price of the Series F warrants to purchase Class A common stock. On July 9, 2015, as a result of the reset adjustment, the
purchase price of Class A common stock in the June 2015 Offering was reset at $1.2432 per share and the exercise price of
the Warrants was adjusted to $1.2432 per share and an additional 2,652,020 shares of Class A common stock were delivered to
June 2015 Offering investors from the escrow established with the Company’s transfer agent.
Series A and Series C Warrant Exchange
for Common Stock
On June 25, 2015, the Company
entered into separate Exchange Agreements (each, an “Exchange Agreement”) with two holders of the Company’s Series
A Warrants and Series C Warrants (together, the “Warrants”) originally issued in the Company’s February 2015
Offering (each, a “Holder”), pursuant to which the Company agreed to exchange all the Warrants for shares of the Company’s
Class A common stock. Under terms of the Exchange Agreement, at closing, the Company and Holders agreed to exchange all Warrants
held by the Holders for shares of Class A common stock equal to 115% of the shares of Class A common stock issuable upon exercise
of the Warrants (the “Exchange”). The Exchange Agreements prohibited the Company from delivering any shares to a Holder
if after such delivery the Holder together with the other “attribution parties” collectively would beneficially own
in excess of 9.99% of the number of shares of Class A common stock outstanding immediately after giving effect to such exchange.
The Company was contractually obligated to issue the shares of Class A common stock issuable in the exchange post-closing at such
time and in such amount as requested by each Holder in accordance with the terms of the Exchange Agreement.
On June 30, 2015, the Company closed
the transaction contemplated by the Exchange Agreements. On June 30, 2015 one Holder exchanged 73,382 Warrant shares for 84,390
shares of Class A common stock. Between July 1, 2015 and July 7, 2015, the other Holder exchanged 1,081,403 Warrant shares for
1,243,614 shares of Class A common stock. In connection with the Exchange Agreement, Company recorded an inducement loss of $0.1
million related to the 15% exchange premium and loss on early extinguishment of debt associated with the common stock warrant liability
of $0.4 million. These losses are included in Change in valuation of warrants on the Condensed Consolidated Statement of Operations
for the nine months ended September 30, 2015.
Conversion of Debt to Equity
On June 24, 2015, the Company
entered into the Conversion Agreement with the Riverside Lender to effect the Conversion. The Company issued to Riverside Lender,
in full satisfaction of the outstanding principal and accrued interest, promissory notes in the aggregate of the original principal
amount of $3.15 million plus accrued interest of $1.1 million, 1,288,156 shares of the Company’s Class A common stock
using a conversion ratio equal to $3.29 per share, the closing price on the Common Stock on June 23, 2015.
To comply with NASDAQ continued listing
requirements, at the closing of the Conversion the Company was unable to issue any shares of Class A common stock to the Riverside
Lender to the extent the issuance would have resulted in the Riverside Lender (together with its affiliates) holding shares of
Class A common stock in excess of 19.99% of the Company’s outstanding shares of common stock immediately after giving effect
to the Conversion. As such, the Company issued 910,000 shares on June 25, 2015 and subsequently issued the remaining shares by
July 15, 2015.
On August 10, 2015, pursuant to the
Conversion Agreement the Company filed a registration statement on Form S-3 to register for resale the shares of Class A common
stock issued in the Conversion and any shares of Class A common stock held by the Riverside Lender’s affiliates. The U.S.
Securities and Exchange Commission declared the registration statement on Form S-3 effective on August 20, 2015.
Riverside is currently the Company’s
largest shareholder and holds approximately 13.7% of the Company’s issued and outstanding shares of Common Stock as of September 30,
2015.
May 2015 Reverse Stock Split
On May 17, 2015, the Company executed
a reverse stock split of all outstanding shares of the Company’s Class A common stock at a ratio of one-for-twenty,
whereby twenty shares of Class A common stock were combined into one share of Class A common stock. The reverse split
was previously authorized by a vote of the Company’s shareholders on May 12, 2015. The Company did not decrease its authorized
shares of capital stock in connection with the reverse stock split. Share amounts are presented to reflect the reverse split in
all periods.
February 2015 Offering
On February 26 and February 27, 2015,
the Company closed an offering of units (the “February 2015 Offering”). Each unit consisted of: (i) one share of Class
A common stock; (ii) a Series A warrant to purchase share of the Company’s Class A common stock equal to 50% of the sum of
the number of shares of Class A common stock purchased as part of the units plus, if applicable, the number of shares of Class
A common stock issuable upon exercise in full of the Series E warrants (without regard to any limitations on exercise) described
below; (iii) a Series B warrant to purchase shares of the Company’s Class A common stock for a “stated amount”
(as described in the offering document); (iv) a Series C warrant to purchase up to 50% of that number of shares of Class A common
stock actually issued upon exercise of the Series B warrant; and (v) a Series D warrant to purchase additional shares of Class
A common stock in an amount determined on a future reset date after the issuance of the Series D warrant. As more fully described
above under “Series A and Series C Warrant Exchange for Common Stock”, during the second quarter, the Company exchanged
shares of Class A common stock for Series A and Series C warrants.
As of September 30, 2015, the Company
has realized net proceeds of $10.6 million from the February 2015 Offering.
Employee Option Exercises, Warrant Exercises and Common Stock
Reserved for Future Issuances
During the nine months ended September 30, 2015, the Company
issued no shares of its Class A common stock to employees upon the exercise of stock options. During the nine months ended
September 30, 2015 and 2014 the Company issued 3,021,581, and 8,363 shares of its Class A common stock pursuant to the exercise
of warrants and additional equity funding, respectively.
At September 30, 2015, the Company had the following shares
of Class A common stock reserved for future issuance:
Stock options and grants outstanding under incentive plans | |
| 148,970 | |
Stock options outstanding under plans not approved by security holders | |
| 4,500 | |
Common stock warrants outstanding - derivative liability | |
| 883,057 | |
Common stock warrants outstanding - equity security | |
| 535,319 | |
| |
| | |
Total shares reserved for future issuance | |
| 1,571,846 | |
7. Share-Based Compensation
During the nine months ended September 30, 2015, the Company
granted 100,150 stock options and cancelled 78,132 stock options versus grants of 118,150 stock options and cancellations of 59,457
stock options during the nine months ended September 30, 2014, under its 2008 Long-Term Incentive Plan. Nearly all of the new stock
options vest in 5% quarterly installments for the 20 quarters beginning with the last day of the quarter in which the options
are granted.
Options issued to the Company’s Board of Directors under
its 2008 Long-Term Incentive Plan vest in 8.33% quarterly installments on the first day of each calendar quarter beginning on April
1, 2015 and ending on April 1, 2018, when the options become fully vested.
Total share-based compensation expense recognized was $0.1 million
and $0.6 million during the three months ended September 30, 2015 and 2014, respectively, and $0.5 million and $1.1 million during
the nine months ended September 30, 2015 and 2014, respectively. Share-based compensation expense is reported separately on the
Company’s Condensed Consolidated Statement of Operations.
8. Income Taxes
The Company performed assessments of the realizability of its
net deferred tax assets generated during each reporting period, considering all available evidence, both positive and negative.
As a result of these assessments, the Company concluded that it was more likely than not that none of its net deferred tax assets
would be recoverable through the reversal of temporary differences and near term normal business results. The Company, during the
nine months ended September 30, 2015 and 2014, increased its valuation allowance by $5.0 million and $17.4 million, respectively.
The Company recognized no income tax benefit for losses incurred during the three and nine months ended September 30, 2015.
9. Net Loss Per Share
Basic net loss per share excludes any dilutive effects of options
or warrants. The Company computes basic net loss per share using the weighted average number of shares of its Class A common
stock outstanding during the period. The Company computes diluted net loss per share using the weighted average number of shares
of its Class A common stock and common stock equivalents outstanding during the period. The Company excluded common stock
equivalents of 1.6 million and 0.6 million for the three months ended September 30, 2015 and 2014, respectively, and 1.6 million
and 0.5 million for the nine months ended September 30, 2015 and 2014, respectively, from the computation of diluted net loss per
share because their effect is antidilutive.
The following table sets forth the computation of basic and
diluted net loss per share:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
(in thousands, except per share data) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net loss: | |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
$ | (3,881 | ) | |
$ | (2,513 | ) | |
$ | (5,858 | ) | |
$ | (12,861 | ) |
Loss from discontinued operations | |
| (397 | ) | |
| (2,237 | ) | |
| (712 | ) | |
| (28,071 | ) |
Net loss | |
$ | (4,278 | ) | |
$ | (4,750 | ) | |
$ | (6,570 | ) | |
$ | (40,932 | ) |
Weighted average shares for basic and diluted net loss per share: | |
| | | |
| | | |
| | | |
| | |
Weighted average shares for basic net loss per share | |
| 12,285 | | |
| 2,553 | | |
| 6,757 | | |
| 2,330 | |
Effect of dilutive securities - weighted average of stock options, restricted stock awards, and warrants | |
| — | | |
| — | | |
| — | | |
| — | |
Weighted average shares for basic and diluted net loss per share | |
| 12,285 | | |
| 2,553 | | |
| 6,757 | | |
| 2,330 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss per share – basic and diluted: | |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
$ | (0.32 | ) | |
$ | (0.98 | ) | |
$ | (0.87 | ) | |
$ | (5.52 | ) |
Loss from discontinued operations | |
| (0.03 | ) | |
| (0.88 | ) | |
| (0.11 | ) | |
| (12.05 | ) |
Net loss | |
$ | (0.35 | ) | |
$ | (1.86 | ) | |
$ | (0.98 | ) | |
$ | (17.57 | ) |
10. Segment Information
During 2014, the Company discontinued its former large commercial
segment and sold the assets of the catalog segment. As a result of this major strategic shift, the Company now operates as three
reportable segments: (1) Residential – the installation of solar energy systems for homeowners, including lease financing
thereof, and for small businesses (small commercial) in the continental U.S.; (2) Sunetric – the installation of solar
energy systems for both homeowners and business owners (commercial) in Hawaii; and (3) Other – catalog, for 2014, and
corporate operations.
Financial information for the Company’s segments and a
reconciliation of the total of the reportable segments’ loss from operations (measures of profit or loss) to the Company’s
consolidated net loss are as follows:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
(in thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net revenue: | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 6,894 | | |
$ | 14,358 | | |
$ | 24,861 | | |
$ | 43,573 | |
Sunetric (a) | |
| 3,544 | | |
| 3,803 | | |
| 10,914 | | |
| 6,875 | |
Other | |
| — | | |
| 739 | | |
| — | | |
| 1,854 | |
Consolidated net revenue | |
| 10,438 | | |
| 18,900 | | |
| 35,775 | | |
| 52,302 | |
Loss from operations: | |
| | | |
| | | |
| | | |
| | |
Residential | |
| (1,809 | ) | |
| (3,393 | ) | |
| (4,787 | ) | |
| (7,345 | ) |
Sunetric (a) | |
| 110 | | |
| (1,396 | ) | |
| (41 | ) | |
| (1,545 | ) |
Other | |
| (2,786 | ) | |
| (4,460 | ) | |
| (7,700 | ) | |
| (12,876 | ) |
Consolidated loss from continuing operations | |
| (4,485 | ) | |
| (9,249 | ) | |
| (12,528 | ) | |
| (21,766 | ) |
Reconciliation of consolidated loss from operations to consolidated net loss: | |
| | | |
| | | |
| | | |
| | |
Other income | |
| - | | |
| - | | |
| 147 | | |
| - | |
Interest expense | |
| (54 | ) | |
| (340 | ) | |
| (423 | ) | |
| (795 | ) |
Change in valuation of warrants | |
| 660 | | |
| 6,789 | | |
| 6,924 | | |
| 8,204 | |
Income tax (expense)/benefit | |
| (2 | ) | |
| 287 | | |
| 22 | | |
| 1,496 | |
Loss from discontinued operations, net of tax | |
| (397 | ) | |
| (2,242 | ) | |
| (712 | ) | |
| (28,071 | ) |
Net loss | |
$ | (4,278 | ) | |
$ | (4,750 | ) | |
$ | (6,570 | ) | |
$ | (40,932 | ) |
(a) | Sunetric amounts for the nine months ended 2014 are for the period of May 14, 2014, the acquisition date, through September
30, 2014. |
The following is a reconciliation of reportable segments’
assets to the Company’s consolidated total assets. The Other segment includes certain unallocated corporate amounts.
(in thousands) | |
September 30, 2015 | | |
December 31, 2014 | |
Total assets – continuing operations: | |
| | | |
| | |
Residential | |
$ | 13,351 | | |
$ | 16,322 | |
Sunetric | |
| 4,566 | | |
| 7,430 | |
Other | |
| 626 | | |
| 984 | |
| |
$ | 18,543 | | |
$ | 24,736 | |
Total assets – discontinued operations: | |
| | | |
| | |
Commercial | |
| 4,160 | | |
| 9,509 | |
| |
$ | 22,703 | | |
$ | 34,245 | |
11. Discontinued Operations
The following is a reconciliation of the major line items constituting
pretax loss of discontinued operations to the after-tax loss of discontinued operations that are presented in the condensed consolidated
statements of operations as indicated:
| |
For the Three Months Ended September 30, | | |
For the Nine Months Ended September 30, | |
(in thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Major line items constituting pretax loss of discontinued operations: | |
| | | |
| | | |
| | | |
| | |
Net revenue | |
$ | 117 | | |
$ | 14,409 | | |
$ | 1,026 | | |
$ | 38,329 | |
Cost of goods sold | |
| 343 | | |
| 13,018 | | |
| 922 | | |
| 37,100 | |
Selling and operating | |
| 163 | | |
| 3,254 | | |
| 613 | | |
| 6,720 | |
General and administrative | |
| 8 | | |
| 83 | | |
| 116 | | |
| 83 | |
Stock option compensation | |
| — | | |
| 188 | | |
| — | | |
| 1,580 | |
Acquisition related costs | |
| — | | |
| 22 | | |
| — | | |
| 1,651 | |
Restructuring costs | |
| — | | |
| — | | |
| 31 | | |
| — | |
Depreciation and amortization | |
| — | | |
| 81 | | |
| 56 | | |
| 500 | |
Goodwill and other asset impairments | |
| — | | |
| — | | |
| — | | |
| 18,766 | |
Pretax loss of discontinued operations | |
| (397 | ) | |
| (2,237 | ) | |
| (712 | ) | |
| (28,071 | ) |
Income tax benefit | |
| — | | |
| — | | |
| — | | |
| — | |
Loss on discontinued operations | |
$ | (397 | ) | |
$ | (2,237 | ) | |
$ | (712 | ) | |
$ | (28,071 | ) |
The following is a reconciliation of the carrying amounts of
major classes of assets and liabilities of the discontinued operations to the total assets and liabilities of the discontinued
operations presented separately in the condensed consolidated balance sheets as indicated:
(in thousands) | |
September 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
Carrying amounts of major classes of assets included as part of discontinued operations: | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Accounts receivable, net | |
$ | 1,677 | | |
$ | 6,223 | |
Costs in excess of billings on uncompleted contracts | |
| 1,378 | | |
| 1,841 | |
Inventory, net | |
| 89 | | |
| 242 | |
Deferred costs on uncompleted contracts | |
| — | | |
| 42 | |
Other current assets | |
| 94 | | |
| 79 | |
| |
| | | |
| | |
Total major classes of current assets of the discontinued operations | |
| 3,238 | | |
| 8,427 | |
| |
| | | |
| | |
Noncurrent assets: | |
| | | |
| | |
Property and equipment, net | |
| — | | |
| 45 | |
Other noncurrent assets | |
| 922 | | |
| 1,037 | |
| |
| | | |
| | |
Total noncurrent assets of discontinued operations | |
| 922 | | |
| 1,082 | |
| |
| | | |
| | |
Total assets of the discontinued operations in the balance sheet | |
$ | 4,160 | | |
$ | 9,509 | |
| |
| | | |
| | |
Carrying amounts of major classes of liabilities included as part of discontinued operations: | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 1,994 | | |
$ | 4,977 | |
Accrued liabilities | |
| 2,492 | | |
| 2,608 | |
Billings in excess of costs on uncompleted contracts | |
| — | | |
| 373 | |
Deferred revenue and other current liabilities | |
| 38 | | |
| 26 | |
| |
| | | |
| | |
Total current liabilities of discontinued operations | |
| 4,524 | | |
| 7,984 | |
| |
| | | |
| | |
Noncurrent liabilities: | |
| | | |
| | |
Other liabilities | |
| 225 | | |
| 327 | |
| |
| | | |
| | |
Total major classes of noncurrent liabilities of the discontinued operations | |
| 225 | | |
| 327 | |
| |
| | | |
| | |
Total liabilities of the discontinued operations in the balance sheet | |
$ | 4,749 | | |
$ | 8,311 | |
12. Subsequent Events
On November 6, 2015, the parties to the SVB Loan entered
into the Tenth Modification Agreement pursuant to which Silicon Valley Bank waived non-compliance as of September 30, 2015
with the EBITDA-based financial covenant in the SVB Loan and the parties agreed to certain amendments. The Tenth Modification Agreement
(i) eliminated the EBITDA-based financial covenant as of November 6, 2015 and (ii) replaced it with a liquidity covenant to be
met at all times after November 30, 2015 of $2.5 million in the aggregate of Company cash in SVB accounts and availability under
the SVB Loan. As of September 30, 2015, the Company had outstanding borrowings under the revolving line of credit of $2.7
million. See Note 3. Revolving Line of Credit.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
We recommend users read the following discussion and analysis
of our financial condition and results of operations in conjunction with the Condensed Consolidated Financial Statements and related
notes included elsewhere in this document. This section is designed to provide information that will assist in understanding
our condensed consolidated financial statements, changes in certain items in those statements from period to period, the primary
factors that caused those changes, and how certain accounting principles, policies and estimates affect the condensed consolidated
financial statements.
Discontinued Operations
During 2014, we committed to a plan to sell certain contracts
and rights comprising our large commercial installations business, otherwise known as our former Commercial segment. At the same
time, we determined not to enter into further large commercial installation contracts. We expect that contracts in process at December 31,
2014 will be mostly complete during 2015 with minimal activity in the subsequent year. We now report this business as a discontinued
operation, separate from our continuing operations. The following management discussion and analysis of financial condition and
results of operations is for our continuing operations, unless indicated otherwise.
Overview
We are a residential and small commercial solar energy engineering,
procurement and construction firm. We also perform most of our own sales and marketing activities to generate leads and secure
projects. We offer turnkey services, including design, procurement, permitting, build-out, grid connection, financing referrals
and warranty and customer satisfaction activities. Our solar energy systems use high-quality solar photovoltaic modules. We use
proven technologies and techniques to help customers achieve meaningful savings by reducing their utility costs. In addition, we
help customers lower their emissions output and reliance upon fossil fuel energy sources.
We, including our predecessors, have more than 35 years of experience
in residential solar energy and trace our roots to 1978, when Real Goods Trading Corporation sold the first solar photovoltaic
panels in the United States. We have designed and installed tens of thousands of residential and commercial solar energy systems
since our founding.
During 2014, we discontinued our entire former Commercial segment
and sold the assets associated with our catalog segment (a portion of the Other segment). As a result of this major strategic shift,
we now operate as three reportable segments: (1) Residential – the installation of solar energy systems for homeowners,
including lease financing thereof, and for small businesses (small commercial) in the continental U.S.; (2) Sunetric –
the installation of solar energy systems for both homeowners and business owners (commercial) in Hawaii; and (3) Other –
catalog, for 2014, and corporate operations. We believe this new structure will enable us to more effectively manage our operations
and resources.
We generally recognize revenue from solar energy systems sold
to our customers when we install the solar energy system. Our business requires that we incur costs of acquiring solar panels and
labor to install solar energy systems on our customer rooftops up-front and receive cash from customers thereafter. As a result,
during periods when we are increasing sales, we expect to have negative cash flow from operations, a portion of which we offset
with borrowings under our line of credit. We account for our leases of solar energy systems as sales-type leases.
Backlog
Backlog represents the dollar amount of revenue that we may
recognize in the future from signed contracts to install solar energy systems that have not yet been installed without taking into
account possible future cancellations. Backlog is not a measure defined by GAAP, and is not a measure of contract profitability.
Our methodology for determining backlog may not be comparable to methodologies used by other companies in determining their backlog
amounts. The backlog amounts we disclose include anticipated revenues associated with: (1) the original contract amounts; (2) change
orders for which we have received written confirmations from the applicable customers, and (3) net of cancellations.
Backlog may not be indicative of future operating results, and
projects in our backlog may be cancelled, modified or otherwise altered by customers. We can provide no assurance as to the profitability
of our contracts reflected in backlog.
The following table summarizes changes to our backlog by segment
during the nine month period ended September 30, 2015:
(in thousands) | |
Residential | | |
Sunetric | | |
Totals | |
Backlog of December 31, 2014 | |
$ | 39,726 | | |
$ | 21,818 | | |
$ | 61,544 | |
Bookings from new awards (“Sales”) | |
| 5,237 | | |
| 4,364 | | |
| 9,601 | |
Cancellations and reductions on existing contracts | |
| (9,048 | ) | |
| (5,946 | ) | |
| (14,994 | ) |
Amounts recognized in revenue upon installation | |
| (6,728 | ) | |
| (3,752 | ) | |
| (10,480 | ) |
Backlog at March 31, 2015 | |
| 29,187 | | |
| 16,484 | | |
| 45,671 | |
Bookings from new awards (“Sales”) | |
| 5,136 | | |
| 1,110 | | |
| 6,246 | |
Cancellations and reductions on existing contracts | |
| (5,773 | ) | |
| (1,300 | ) | |
| (7,073 | ) |
Amounts recognized in revenue upon installation | |
| (10,997 | ) | |
| (3,670 | ) | |
| (14,667 | ) |
Backlog at June 30, 2015 | |
| 17,553 | | |
| 12,624 | | |
| 30,177 | |
Bookings from new awards (“Sales”) | |
| 5,843 | | |
| 3,320 | | |
| 9,163 | |
Cancellations and reductions on existing contracts | |
| (5,176 | ) | |
| (1,335 | ) | |
| (6,511 | ) |
Amounts recognized in revenue upon installation | |
| (6,717 | ) | |
| (3,658 | ) | |
| (10,375 | ) |
Backlog at September 30, 2015 | |
$ | 11,503 | | |
$ | 10,951 | | |
$ | 22,454 | |
We have experienced a high level of contract cancellations during
2015, which we attribute to (i) the fact that our financial conditions, as previously disclosed, limited our access to solar panels
such that we were not able to install solar energy systems in a time frame to satisfy certain customers and (ii) our history of
operating losses and resulting declining stock price affecting customer decisions. We have determined that for optimum internal
operations, and customer satisfaction, that a backlog equivalent to a few months of sales is optimal. Further, we have determined
that our sales efforts should be broadened to additional states to minimize the impact of weather on our seasonal results, and
to better balance the construction capacity of our internal and third-party installers.
We did not emphasize originating new sales during the first
half of 2015 as making material additions to the size of our existing backlog during a period where we were experiencing extended
times for installing signed contracts was not considered an effective strategy. These delays were, in part, a result of financial
limitations on our ability to acquire access to solar panels. Also, during this period, we were pursuing tactics to transform our
sales and marketing functions for improved sales efficiency in future periods; our strategy has been to emphasize new sales once
these transformations were complete and our financial position improved, thereby allowing us greater access to solar panels through
vendors and anticipated greater customer receptivity because of an improved financial position. During this period, the size of
our outside field sales organization was significantly reduced in the residential segment as a result of the new sales and marketing
approach and, in the Sunetric segment, because of actions by the local utility that limited sales opportunities. Further, our programs
to pay third parties for customer leads have been materially curtailed.
We continue to expand the size of our e-sales call-center based
sales organization to increase our future sales awards, both for our current states of operation and new states where we may operate
in future periods. Our customers currently finance their acquisition of solar energy systems using their own cash, a loan they
receive from a financial provider, or a lease provided by either us or a third party lease financier. We believe that to be successful
in increasing our sales and resultant revenue, we need to:
| · | Expand the size of our call center sales organization. |
| · | Expand the size of our east coast residential and Sunetric field sales organizations. |
| · | Expand our digital marketing program, as well as increase spending to generate customer leads while achieving our desired cost
of acquisition. |
| · | Make available to our customers additional third-party providers to finance customer acquisitions of our solar energy systems. |
| · | Expand the size of our residential east coast and Sunetric construction organization. |
| · | Expand our network of authorized third party installers, including potential new states of operations. |
| · | Commence sales into new states of operations. |
In order to pursue the above tactics we will need to obtain
additional financing. We compete with larger, better-financed firms for customers, employees, and the services of third party financiers
and installers and, accordingly, there can be no assurance that we will be successful in meeting our goals for increasing sales
and revenue.
As we execute the tactics above designed to increase future
revenue, we will incur up-front costs for sales and marketing and, accordingly, we expect that during the remainder of 2015, our
selling and operating expenses will increase in dollar amount and as a percentage of revenue.
Recent Developments
During 2015, in conjunction with our plans to position the Company
for future profitable operations, we have:
| · | Raised $16.5 million of additional capital through September 30, 2015, before offering expenses. |
| · | Eliminated our subordinated debt by converting all outstanding amounts into Class A common stock. |
| · | Extinguished a portion of the common stock warrant liability to reduce future volatility. |
| · | Reduced and realigned our workforce and closed offices in California to reduce fixed operating cost infrastructure. |
| · | Modified our commission plans and marketing spend plans to be cost efficient. |
| · | Entered into arrangements with third party installers under programs that will reduce our investment in working capital for
transactions. |
| · | Entered into an arrangement with a financier to acquire leases to be originated in future periods to reduce the working capital
required for leasing transactions. |
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies
or estimates during the nine months ended September 30, 2015 from those disclosed in our annual report on Form 10-K for the year
ended December 31, 2014.
Results of Operations
Three Months Ended September 30, 2015 Compared to Three
Months Ended September 30, 2014
Net revenue. Net revenue decreased $8.5 million, or 45%,
to $10.4 million during the three months ended September 30, 2015 from $18.9 million during the three months ended September 30,
2014. Net revenue for our residential segment decreased $7.5 million, or 52.0%, to $6.9 million during the three months ended September 30,
2015 from $14.4 million during the three months ended September 30, 2014. On a comparative basis, installation revenue in
California declined by $4.4 million, east coast Solarized Programs declined by $1.9 million and the retail segment, which is discontinued,
declined by $0.7 million. As previously reported for the fourth quarter of 2014, we were not successful in growing our sales in
California, due to the competitive landscape and high costs per acquisition of customers. The residential segment decreased megawatts
installed by 2.0 megawatts, or 55.7%, to 1.5 megawatts during the three months ended September 30, 2015 from 3.5 megawatts
during the three months ended September 30, 2014. The Sunetric segment increased megawatts installed by 0.22 megawatts, or
32.2%, to 0.9 megawatts during the three months ended September 30, 2015 from 0.68 megawatts during the three months ended
September 30, 2014.
Gross profit. Gross profit decreased $1.6 million, or
51.2%, to $1.6 million or 14.9% of net revenue during the three months ended September 30, 2015 from $3.2 million or 16.9%
of net revenue during the three months ended September 30, 2014. Gross profit for our residential segment decreased $2.0 million,
or 69.6%, to $0.8 million or 12.5% of net revenue during the three months ended September 30, 2015 from $2.8 million or 19.7%
of net revenue during the three months ended September 30, 2014. The decrease in the residential segment’s gross profit
margin percentage was due to the proportionate greater absorption of fixed costs associated with the decline in revenue of $7.5
million from the prior year quarter. Gross profit for our Sunetric segment was $0.7 million or 19.6% of net revenue during the
three months ended September 30, 2015 as compared to $0.2 million or 4.0% of net revenue for the three months ended September 30,
2014.
Selling and operating expenses. Selling and operating
expenses decreased $3.6 million, or 51.1%, to $3.4 million or 32.9% of net revenue during the three months ended September 30,
2015 from $7.0 million or 37.1% of net revenue during the three months ended September 30, 2014. Selling and operating expenses
for our residential segment decreased $3.2 million, or 56.4%, to $2.4 million or 35.6% of net revenue during the three months ended
September 30, 2015 from $5.6 million or 39.2% of net revenue during the three months ended September 30, 2014. The decrease
in the residential segment’s selling and operating expenses was attributable to the reduction of headcount, creating a new
commission payout structure, and management’s decision to reduce the costs of customer leads. Selling and operating expenses
for our Sunetric segment were $0.6 million or 16.1% of net revenue during the three months ended September 30, 2015 from $0.7
million or 17.2% of net revenue for three months ended September 30, 2014.
General and administrative expenses. General and administrative
expenses decreased $1.0 million, or 43.9%, to $1.2 million or 11.8% of net revenue during the three months ended September 30,
2015 from $2.2 million or 11.6% of net revenue during the three months ended September 30, 2014. General and administrative
expenses for our other segment decreased $0.8 million, or 44.3%, to $1.1 million or 0.0% of net revenue during the three months
ended September 30, 2015 from $1.9 million or 260.08% of net revenue during the three months ended September 30, 2014. The
decrease in the other segment’s general and administrative expenses was primarily due to exiting our Retail business and
our reduction of headcount.
Litigation expenses. Litigation expenses during the three
months ended September 30, 2015 consist of $1.1 million associated with the legal costs of responding to the U.S. Securities and
Exchange Commission subpoena, as more fully described in Note 5. Commitments and Contingencies.
Acquisition-related and other costs. Acquisition-related
and other costs were $0.0 million during the three months ended September 30, 2015 and $0.1 million during the three months
ended September 30, 2014.
Restructuring costs. Restructuring costs were $0.1 million
during the three months ended September 30, 2015 and $0.4 million during the three months ended September 30, 2014. Restructuring
costs are related to the costs of closing multiple office locations.
Depreciation and Amortization. Depreciation and Amortization
were $0.1 million during the three months ended September 30, 2015 and $1.0 million during the three months ended September 30,
2014.
Interest expense. Interest expense decreased $0.2 million
to $0.1 million during the three months ended September 30, 2015 from $0.3 million during the three months ended September 30,
2014. The decrease reflects a lower weighted average utilization of our line of credit due to the receipt of proceeds from the
2015 Offerings.
Change in valuation of warrants, net. We recorded noncash
income of $0.6 million during the three months ended September 30, 2015 compared to $6.8 million during the three months ended
September 30, 2014, a decrease of $6.2 million. The change in valuation of warrants is due to decreasing stock prices causing a
reduction in the carrying value of the common stock warrant liabilities.
Income tax benefit. Income tax benefit was $0.0 million
during the three months ended September 30, 2015 and $0.3 million during the three months ended September 30, 2014. The
2014 income tax benefit represents the portion of the change in the tax valuation allowance related to the net deferred tax liabilities
established as part of the purchase consideration transferred allocation for Sunetric.
Loss from continuing operations. Our loss from continuing
operations during the three months ended September 30, 2015 was $3.9 million, or $(0.32) per share, as compared to a loss
from continuing operations of $2.5 million, or $(0.98) per share, during the three months ended September 30, 2014.
Loss from discontinued operations. Our loss from
discontinued operations during the three months ended September 30, 2015 was $0.4 million, or $(0.03) per share, as compared
to a loss from discontinued operations of $2.2 million, or $(0.88) per share, during the three months ended September 30,
2014.
Net loss. Our net loss during the three months ended
September 30, 2015 was $4.3 million, or $(0.35) per share, as compared to a net loss of $4.8 million, or $(1.86) per share,
during the three months ended September 30, 2014.
Nine Months Ended September 30, 2015 Compared to
Nine Months Ended September 30, 2014
Net revenue. Net revenue decreased $16.5 million, or
31.6%, to $35.8 million during the nine months ended September 30, 2015 from $52.3 million during the nine months ended September 30,
2014. Net revenue for our residential segment decreased $18.7 million, or 42.0%, to $24.9 million during the nine months ended
September 30, 2015 from $43.6 million during the nine months ended September 30, 2014, primarily due to exiting the Colorado
and Missouri markets. The residential segment decreased megawatts installed by 5.5 megawatts, or 48.6%, to 5.8 megawatts during
the nine months ended September 30, 2015 from 11.3 megawatts during the nine months ended September 30, 2014. The Sunetric
segment increased megawatts installed by 1.3 megawatts, or 100.4%, to 2.7 megawatts during the nine months ended September 30,
2015 1.4 megawatts for the period May 14, 2014, the acquisition date, through September 30, 2014.
Gross profit. Gross profit decreased $5.6 million, or
53.3%, to $4.9 million or 13.7% of net revenue during the nine months ended September 30, 2015 from $10.5 million or 20.1%
of net revenue during the nine months ended September 30, 2014. Gross profit for our residential segment decreased $5.7 million,
or 63.8%, to $3.3 million or 13.1% of net revenue during the nine months ended September 30, 2015 from $9.0 million or 20.7%
of net revenue during the nine months ended September 30, 2014. As previously mentioned, the decrease in the residential segment’s
gross profit percentage was due to the proportionate greater absorption of fixed costs associated with the decline in revenue of
$7.5 million from the prior year quarter. Gross profit for our Sunetric segment was $1.6 million or 15.1% of net revenue during
the nine months ended September 30, 2015 as compared to $1.0 million or 13.9% of net revenue for the period from May 14, 2014,
the acquisition date, through September 30, 2014.
Selling and operating expenses. Selling and operating
expenses decreased $9.4 million, or 47.6%, to $10.4 million or 29.1% of net revenue during the nine months ended September 30,
2015 from $19.8 million or 38.0% of net revenue during the nine months ended September 30, 2014. Selling and operating expenses
for our residential segment decreased $8.4 million, or 53.1%, to $7.4 million or 29.7% of net revenue during the nine months ended
September 30, 2015 from $15.8 million or 36.1% of net revenue during the nine months ended September 30, 2014. The decrease
in the residential segment’s selling and operating expenses was attributable to the reduction of headcount, creating a new
commission payout structure, and management’s decision to reduce the costs of customer leads. Selling and operating expenses
for our Sunetric segment were $1.6 million or 15.6% of net revenue during the nine months ended September 30, 2015 compared
to $1.2 million or 17.1% of net revenue for the period May 14, 2014, the acquisition date, through September 30, 2014.
General and administrative expenses. General and administrative
expenses decreased $2.5 million, or 37.6%, to $4.1 million or 11.5% of net revenue during the nine months ended September 30,
2015 from $6.6 million or 12.6% of net revenue during the nine months ended September 30, 2014. General and administrative
expenses for our Sunetric segment were $0.1 million or 0.6% of net revenue during the nine months ended September 30, 2015
as compared to $0.0 million or 0.3% of net revenue for the period May 14, 2014, the acquisition date, through September 30, 2014.
General and administrative expenses for our other segment decreased $2.7 million, or 42.7%, to $3.6 million or 0% of net revenue
during the nine months ended September 30, 2015 from $6.3 million or 339.5% of net revenue during the nine months ended September 30,
2014. The decrease in the other segment’s general and administrative expenses was primarily due to exiting our Retail business
and our reduction of headcount across the Company.
Acquisition-related and other costs. Acquisition-related
and other costs were $0.0 million during the nine months ended September 30, 2015 and $0.9 million during the nine months
ended September 30, 2014 and were comprised of acquisition and integration costs related to Sunetric and Syndicated Solar
Inc., respectively.
Restructuring costs. Restructuring costs were $0.4 million
during the nine months ended September 30, 2015 and $0.4 during the nine months ended September 30, 2014. Restructure
costs are related to the costs of obtaining a fairness opinion and related legal services in connection with the conversion of
subordinated debt to equity as well as costs related to the closings of multiple offices.
Litigation expenses. Litigation expenses during the nine
months ended September 30, 2015 consist of $1.6 million pursuant to our recording a charge associated with the settlement of the
July 2014 PIPE and the legal costs of responding to the U.S. Securities and Exchange Commission subpoena regarding the same transaction,
as more fully described in Note 5. Commitments and Contingencies.
Depreciation and amortization. Depreciation and amortization
were $0.4 for the nine months ended September 30, 2015 and were $2.2 million during the nine months ended September 30,
2014 and reflects the amortization of intangible assets associated with the purchase of Sunetric.
Other income. Other income was $0.1 million for the nine
months ended September 30, 2015; a reversal of previously accrued interest expense arising from the settlement of a sales
tax audit.
Interest expense. Interest expense decreased $0.4 million
to $0.4 million during the nine months ended September 30, 2015 from $0.8 million during the nine months ended September 30,
2014. The decrease reflects a lower weighted average utilization of our line of credit due to the receipt of proceeds from the
2015 Offerings.
Change in valuation of warrants, net. We recorded noncash
income of $6.9 million during the nine months ended September 30, 2015 compared to $8.2 million during the nine months ended
September 30, 2014, a decrease of $1.4 million. The change in valuation of warrants is due to decreasing stock prices causing a
reduction in the carrying value of the common stock warrant liabilities.
Income tax benefit. Income tax benefit was $0.0 million
during the nine months ended September 30, 2015 and $1.5 million during the nine months ended September 30, 2014. The
2014 income tax benefit represents the portion of the change in the tax valuation allowance related to the net deferred tax liabilities
established as part of the purchase consideration transferred allocation for Sunetric.
Loss from continuing operations. As a result of
the above factors, our loss from continuing operations during the nine months ended September 30, 2015 was $5.9 million, or
$(0.87) per share, as compared to a loss from continuing operations of $12.9 million, or $(5.52) per share, during the nine months
ended September 30, 2014.
Loss from discontinued operations. Our loss from
discontinued operations during the nine months ended September 30, 2015 was $0.7 million, or $(0.11) per share, as compared
to a loss from discontinued operations of $28.1 million, or $(12.05) per share, during the nine months ended September 30,
2014.
Net loss. Our net loss during the nine months ended
September 30, 2015 was $6.6 million, or $(0.97) per share, as compared to a net loss of $40.9 million, or $(17.57) per share,
during the nine months ended September 30, 2014.
Seasonality
Our quarterly net revenue and operating results for solar energy
system installations are difficult to predict and have, in the past, and may, in the future, fluctuate from quarter to quarter
as a result of changes in state, federal, or private utility company subsidies, as well as weather, economic trends and other factors.
We have historically experienced seasonality in our solar installation business, with the first quarter representing our lowest
installation quarter of the year primarily due to weather.
Liquidity and Capital Resources
Our capital needs arise from working capital required to fund
operations, including procurement of materials such as photovoltaic panels and inverters, operating and back office infrastructure,
maintenance, expansion and improvement, and future growth. These operating requirements depend on numerous factors, including
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 necessary to remain competitive in the marketplace, 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 operating
requirements are variable and may fluctuate from time to time, as well as varying based on seasonality. We did not have any material
commitments for capital expenditures as of September 30, 2015, and we do not presently have any plans for future material capital
expenditures.
As amended, the amount of available credit under the revolving
line of credit is $5.0 million, subject to the Borrowing Base (as defined in the SVB Loan) of 75% of Eligible Accounts (as
defined in the SVB Loan).
As of September 30, 2015, the borrowers under the SVB Loan
were not in compliance with the minimum EBITDA financial covenant for the compliance period ended September 30, 2015. On November
6, 2015, Silicon Valley Bank waived this default in connection with amending the SVB Loan. The amendment removed the minimum EBITDA
financial covenant and replaced it with a minimum liquidity requirement of $2.5 million comprised of the aggregate of our cash
held at Silicon Valley Bank and availability under the SVB Loan.
We are required to satisfy the minimum liquidity covenant at
all times beginning on November 30, 2015. We would not currently satisfy the minimum liquidity covenant and do not expect to satisfy
it as of November 30, 2015 unless we are able to obtain additional capital on or before that date. There can be no assurance that
we will be able to satisfy this covenant in future fiscal periods. We will need to demonstrate sufficient liquidity to renew
the SVB Loan which matures March 15, 2016. There can be no assurance that we will be successful in doing so. If we fail to meet
this covenant in the future and Silicon Valley Bank does not waive such failure, Silicon Valley Bank will be able to call an event
of default under the SVB Loan and require us to repay all outstanding indebtedness thereunder or to exercise other rights under
the SVB Loan.
We have evaluated the following conditions or events: (i) the
U.S Securities and Exchange Commission subpoena initially disclosed as a Risk Factor in the second quarter report on Form 10-Q
and subsequently updated in this quarter’s Form 10-Q which identified, among other matters, that we would be subject to material
legal expenses, (ii) we incurred material legal fees this quarter and our insurance carrier has denied reimbursement, (iii) we
require additional funds to implement our plans to grow our sales and construction capabilities, and (iv) our lender has waived
the covenant default as discussed above but has required that we meet a liquidity test at all times beginning November 30, 2015,
which will require us raise additional capital by that date. To increase liquidity, we could sell assets, materially reduce operating
costs and seek extended terms for our obligations; however, such actions, should they be successful, would adversely impact future
operating results. In evaluating these conditions and events in the aggregate, we determined that in order to continue our plan
to increase sales and construction capabilities, meet our obligations for the next twelve months and also to comply with the liquidity
covenant of the amended SVB Loan, it is necessary that we raise additional capital. We have engaged an investment-banking firm
to assist us with raising additional capital, expected to occur during the fourth quarter 2015. Although we believe we have demonstrated
a track record of raising capital, no assurances can be given that we will be successful in raising such capital or in sufficient
amounts. If additional capital was not raised, we would be required to curtail plans to expand our sales and construction capabilities
and instead materially reduce operating expenses, dispose of assets, as well as seek extended terms on our obligations, the effect
of which would adversely impact future operating results. No assurances can be given that we would be successful in reducing our
operating expenses, disposing of assets or seeking extended terms on our obligations.
The Company had total cash and available borrowings as follows:
For
the quarter ended (in thousands) | |
October
30, 2015 | | |
September
30, 2015 | | |
December
31, 2014 | |
Cash
plus availability under current borrowing base | |
$ | 886 | | |
$ | 1,090 | | |
$ | 3,001 | |
Cash
plus availability under maximum allowed borrowing base | |
$ | 3,736 | | |
$ | 3,519 | | |
$ | 3,097 | |
The decline in the size of the borrowing base arose from (i)
the Company not focusing on sales generation during the first half of 2015 as discussed under Backlog and (ii) the current level
of solar energy system installations not being sufficient to increase the size of the borrowing base. If the Company is successful
with its goal of increasing sales and installations of solar energy systems, it is expected that the size of the future borrowing
base will increase.
We have prepared our business plan for 2015, taking into account
(i) the proceeds from the 2015 Offerings, (ii) anticipated timing of vendor payments for existing accounts payable and for new
solar panels, (iii) anticipated timing of sales and installations of solar energy systems, (iv) anticipated timing of collection
of accounts receivable, and (v) our operating cost structure following the implementation of cost improvement actions. Our
objectives in preparing this plan included (i) further reducing our fixed operating cost infrastructure commencing during
the first quarter of 2015 in order to reduce the required level of future revenue for profitable operations (ii) obtaining more
favorable vendor terms and costs of materials and (iii) reducing our present operating losses and with the intention of returning
to profitable operations in the future. Elements of this plan include, among others, (i) realizing operating costs savings
from reductions in staff, commencing in the first quarter of 2015, (ii) the positive impact of the strategic decision to exit
the large commercial segment which operated at both a substantial cash and operating loss, (iii) moving towards an optimized
field and e-sales force, (iv) optimizing our construction capability for solar energy system installations through authorized
third-party integrators to realize the revenue from installation of the backlog and minimize the impact on gross margin of idle
construction crew time, (v) changing the mix of marketing expenditures to achieve a lower cost of acquisition than that employed
in prior periods, and (vi) continued internal efforts to convert our accounts receivable to cash more quickly.
We expect that we will have a cash outflow from operating activities
for the balance of the year as we will utilize cash to fund an anticipated increased level of rooftop installations for customers,
thereby generating revenue, expand our e-sales and field sales organizations as well as increased marketing spend for lead generation,
and also to continue to reduce our present accounts payable.
Cash Flows
The following table summarizes our primary sources (uses) of
cash during the periods presented:
| |
Nine Months
Ended September 30, | |
(in thousands) | |
2015 | | |
2014 | |
Net cash provided by (used in): | |
| | | |
| | |
Operating activities – continuing operations | |
$ | (15,234 | ) | |
$ | (12,966 | ) |
Operating activities – discontinued operations | |
| 1,075 | | |
| (18,333 | ) |
| |
| | | |
| | |
Operating activities | |
| (14,159 | ) | |
| (31,299 | ) |
| |
| | | |
| | |
Investing activities | |
| 31 | | |
| 11,903 | |
| |
| | | |
| | |
Financing activities | |
| 13,422 | | |
| 8,716 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
$ | (706 | ) | |
$ | (10,680 | ) |
Continuing Operations
Operating activities. Our operating activities used net
cash of $15.2 million and $13.0 million during the nine months ended September 30, 2015 and 2014, respectively. Our net cash used
in operating activities during the nine months ended September 30, 2015 was due to our net loss of $6.3 million, increased by noncash
items of $5.8 million and a net increase in working capital assets and liabilities of $3.1 million. The change in noncash items
was primarily related to a gain recognized on the change in valuation of warrants, while the increase in working capital assets
and liabilities was primarily related to the pay down of aged accounts payable. Our net cash used in operating activities during
the nine months ended September 30, 2014 was primarily due to our net loss increased by noncash items of $1.0 million and a decrease
in working capital assets and liabilities of $0.6 million.
Investing activities. During the nine months ended September
30, 2015, we received proceeds of $0.2 million for the sale of equipment that was offset by the acquisition of property and equipment.
During the nine months ended September 30, 2014, our investing activities provided net cash of $11.9 million consisting of
$12.0 million from acquired businesses, offset by the acquisition of property and equipment.
Financing activities. Our financing activities
provided net cash of $13.4 million and $8.7 million during the nine months ended September 30, 2015 and 2014, respectively. Our
net cash provided by financing activities during the nine months ended September 30, 2015 reflected the net proceeds on the issuance
of Class A common stock and warrants of $15.1 million offset by net repayments against our revolving line of credit of $1.6
million. Our net cash provided by financing activities during the nine months ended September 30, 2014 reflected the net proceeds
on the issuance of Class A common stock and warrants, and the exercise of warrants of $6.8 million and additional net
borrowing on the line of credit of $4.8 million offset by the repayment of $1.0 million on a related party term note and the repayment
of $2.0 million on the SVB Loan. We did not utilize the line of credit during the first quarter of 2014 and therefore had fewer
borrowings and repayments during the nine months ended September 30, 2014.
Discontinued Operations
Operating activities. Our operating activities provided
net cash of $1.1 million and used $18.3 million during the nine months ended September 30, 2015 and 2014, respectively. Our
net cash provided by operating activities during the nine months ended September 30, 2015 was primarily due to our net loss, increased
by a reduction in accounts receivable and costs in excess of billings of $5.2 million, and offset by an increase of $3.4 million
in liabilities. Our net cash used in operating activities during the nine months ended September 30, 2014 was primarily due to
our net loss decreased by the impairment charge of $18.8 million and increased by the net change in working capital assets and
liabilities of $8.9 million, attributable to an increase of $4.5 million in accounts receivable and a net decrease in liabilities
of $3.0 million.
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 and as a result we do
not have and are not reasonably likely to have any off-balance sheet arrangements.
Risk Factors
We caution that there are risks and uncertainties that could
cause our actual results to be materially different from those indicated by forward-looking statements that, from time-to-time,
we make in filings with the U.S. Securities and Exchange Commission, news releases, reports, proxy statements, registration statements
and other written communications as well as oral forward-looking statements made by our representatives. These risks and uncertainties
include, but are not limited to, those risks set forth in Part II, Item 1A of this report and listed in our Annual Report on Form 10-K
for the year ended December 31, 2014. Except for the historical information contained herein, the matters discussed in this
analysis are forward-looking statements that involve risk and uncertainties, including, but not limited to, general economic and
business conditions, competition, pricing, brand reputation, consumer trends, and other factors which are often beyond our control.
We do not undertake any obligation to update forward-looking statements except as required by law.
Investing in our securities involves significant risks. You
should carefully read the risk factors set forth in Part II, Item 1A of this report and in the section entitled “RISK FACTORS”
in our Annual Report on Form 10-K for the year ended December 31, 2014, which is on file with the U.S. Securities and Exchange
Commission. Before making an investment decision, you should carefully consider these risks. The risks and uncertainties we have
described are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial may also affect our business operations. We do not undertake any obligation to update forward-looking statements
except as required by law.
| Item 3. | Quantitative and Qualitative Disclosures About
Market Risk |
Our financial instruments consist primarily of cash and cash
equivalents. We are exposed to market risks, which include changes in common stock warrant liability as a result of fluctuations
in the price of our Class A common stock and changes in U.S. interest rates and foreign exchange rates. We do not engage in financial
transactions for trading or speculative purposes.
At September 30, 2015, the estimated
fair value of derivative instruments was $0.5 million. We estimate the fair values of these instruments using the Monte Carlo option
pricing model which takes into account a variety of factors, including historical stock price volatility, risk-free interest rates,
remaining maturity and the closing price of our Class A common stock. We believe that the assumption that has the greatest impact
on the determination of fair value is the closing price of our Class A common stock. The recognition of gain and loss is primarily
due to changes in our stock prices resulting in adjustments to the carrying value of the common stock warrant liability. Accordingly,
as our stock price goes up, the liability is increased and we record expense, and conversely, when our stock price goes down, the
liability is decreased and we record income.
At
times, we are exposed to market risk from adverse changes in interest rates with respect to the short-term floating interest rate
on borrowings under the SVB Loan. As of September 30, 2015, we had $2.7 million in borrowings outstanding under the SVB Loan.
Any borrowings outstanding accrue interest at the greater of (i) the greater of (a) the bank’s prime rate or (b) 4.00%,
plus 4.00%, and (ii) 8.00%. As of September 30, 2015, if the bank’s prime rate were to increase or decrease by
one percentage point, our interest expense would increase or decrease by approximately $0.1 million per year.
We purchase most of our product inventory from vendors inside
the United States in transactions that are primarily U.S. dollar denominated transactions. Since the percentage of our international
purchases denominated in currencies other than the U.S. dollar is small, currency risks related to these transactions are immaterial
to us. However, a decline in the relative value of the U.S. dollar to other foreign currencies could lead to increased purchasing
costs. In order to mitigate this exposure, we make virtually all of our purchases in U.S. dollars.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our chief executive officer, who also
serves as our acting principal financial officer, and our principal accounting officer, conducted an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and Rule 15d-15(e) under
the Exchange Act. Based upon their evaluation as of September 30, 2015, they have concluded that our disclosure controls and procedures
are not effective.
In connection with our evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures and the assessment of internal control over financial reporting
under Section 404 of the Sarbanes-Oxley Act of 2002 for calendar 2014, we identified material weaknesses in our disclosure controls
and procedures and internal control over financial reporting. For a discussion of our internal financial reporting and a description
of the identified material weaknesses, see Item 9A. Controls and Procedures included on our Annual Report on Form 10-K for the
year ended December 31, 2014.
Changes in Internal Control over Financial Reporting
Since the appointment
of our current chief executive officer in the third quarter of 2014, management began documentation and testing of internal controls
which has led to enhancements in controls during the fourth quarter of 2014 and 2015 to-date related to review and approval of
journal entries, account reconciliations as well as enhanced documentation standards. We will continue to improve our internal
controls during 2015 to remedy the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December
31, 2014.
Remediation Plan for Material Weaknesses in Internal Control
over Financial Reporting and Disclosure Controls and Procedures
We have begun taking steps and plan to take additional measures
to remediate the underlying cause of the material weaknesses in our internal control over financial reporting and disclosure controls
and procedures. Management intends to:
| 1) | Implement enhanced system-based controls, as well as other compensating controls, over restricted access, automated controls
and change management activities within our ERP and other information technology systems. |
| 2) | Continue to supplement our accounting department with personnel having an appropriate level of accounting knowledge, experience
and training commensurate with our financial reporting requirements, and continue to train them on our control |
procedures, including, without limitation, account
reconciliations, that are intended to ensure (i) appropriate supporting documentation is prepared and reviewed timely and (ii)
that we file regulatory reports on a timely basis;
| 3) | Prepare an accounting policies and procedures manual and other written control documentation, and conduct training of accounting
and operational personnel on accounting policies and procedures; and |
| 4) | Revise our procedures for testing of our internal control over financial reporting, including changing the start date for the
process to earlier in the year. |
Our management believes that these measures will address the
issues described above. We can make no assurance that these plans will be sufficient to correct the material weaknesses in internal
control over financial reporting and on disclosure controls and procedures or that additional steps may not be necessary in the
future. Our management and the audit committee of our board of directors will continue to monitor the effectiveness of our internal
control over financial reporting and on disclosure controls and procedures on an ongoing basis and will take further action as
appropriate.
PART II – OTHER INFORMATION
On July 9, 2014, the Company completed a
private offering of approximately $7.0 million of Class A common stock and warrants at a price per share of $48.00 ($2.40
pre-reverse split). Subsequently, the Company’s stock price declined to $1.18 as of September 30, 2015 and four of the
investors that participated in the offering (out of approximately 20 total investors that participated in the offering) have
asserted claims against the Company in three separate lawsuits alleging certain misrepresentations and omissions in the
offering. Effective July 15, 2015 the Company settled with the four investors. The Company recorded a charge to operations of
$0.5 million as of June 30, 2015, in recognition of the loss contingency for the July 2014 PIPE offering. That charge was
equal to the retention under the Company’s 2014-15 Officers and Directors liability insurance policy as the Company
expects the insurance policy will cover any future claims in excess of the retention limit.
On June 29, 2015, the Company received a
subpoena from the U.S. Securities and Exchange Commission requesting the production of documents, records and information
related to an investigation into the Company’s July 2014 PIPE offering. The Company believes that it has complied fully
with all applicable laws, rules and regulations, and has been cooperating fully with the government’s investigation.
The Company has established a special committee of the board of directors to review the facts and circumstances surrounding
the July 2014 PIPE Offering and engaged outside counsel to assist it with its review. As a result, the Company has incurred
litigation expenses of $1.1 million which are shown on the Condensed Consolidated Statements of Operations for quarter
ended September 30, 2015. These legal expenses contributed to the Company not meeting the EBITDA covenant under its loan
facility. The Company and its legal advisors believe its expenses in responding to the U.S. Securities and Exchange
Commission subpoena, which were incurred after June 30, 2015, should be fully paid by its insurance carrier as they are
directly related to the July 2014 PIPE Offering and the Company reached its retention limit for that event during the second
quarter of 2015. However, the insurance carrier has denied coverage for these expenses on the grounds that the U.S.
Securities and Exchange Commission subpoena does not constitute a “claim” covered by the policy. The Company
vigorously disputes the position of its insurance carrier and will continue to pursue coverage of its legal expenses in this
matter. However, as any recovery the Company would receive in the future is a gain contingency, no assurances can be made
that its insurance carrier will, ultimately pay for or reimburse these expenses, or any portion of these expenses.
Except for the updated risk factor appearing below, there have
been no material changes from the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2014.
We need to increase our sales, installations and revenue
in order to achieve our goal of initially operating at break-even, and profitability thereafter. We have developed plans to increase
sales, installations and resulting revenue and require additional financial resources to implement these plans.
Our net revenue decreased $8.5 million, or 45%, to $10.4 million
during the three months ended September 30, 2015 from $18.9 million during the three months ended September 30, 2014. Our current
levels of sales, installations and revenue are not sufficient for profitable operations. We have developed plans to increase sales,
installations and revenue and need additional financial resources to implement these plans. If we are unsuccessful in executing
these plans, or in raising additional capital to finance these plans, we will be unable to increase sales, installations and resulting
revenue and will not achieve our goal of operating at break-even, and profitability thereafter.
We require significant additional funds in order to be in
compliance with the liquidity covenant of our revolving line-of-credit, meet our financial obligations for the ensuing 12-month
period and to maintain and grow our current operations, and may be unable to obtain such funds.
Our operations do not generate sufficient revenue to enable
us to operate profitably or expand our business. We have plans to seek additional capital in the fourth quarter of 2015 through
debt or equity financing. Our revolving line-of-credit has a liquidity covenant that to be met will require us to raise capital
by November 30, 2015. If we are unsuccessful in seeking additional capital, we will be required to seek liquidity from the sale
of assets, material reductions in operating costs, and extending terms for our obligations. These actions would adversely impact
our future financial results. There can be no assurance that we would be successful in seeking additional capital, selling assets
and obtaining extended terms for our obligations.
The U.S. Securities and Exchange Commission’s ongoing
investigation into our July 2014 PIPE offering has adversely affected our reputation, financial resources and operations and is
expected to continue to have a negative impact on us.
On June 29, 2015, we received a subpoena from the U.S. Securities
and Exchange Commission requesting the production of documents, records and information related to an investigation into our July
2014 PIPE offering. We are cooperating with the U.S. Securities and Exchange Commission and have established a special committee
of the board of directors to review the facts and circumstances surrounding the July 2014 PIPE offering and engaged outside counsel
to assist us with our review and response.
As a result of the investigation, we have incurred, and will
continue to incur, significant legal expenses. As of September 30, 2015, we have incurred related litigation expenses of $1.1 million
in connection with the investigation, which are shown on the Condensed Consolidated Statements of Operations. These legal expenses
directly contributed to the Company not meeting the EBITDA covenant under the SVB Loan as of September 30, 2015. We and our legal
advisors believe the expenses incurred in connection with the U.S. Securities and Exchange Commission subpoena, which were incurred
after June 30, 2015, should be fully paid by our insurance carrier as they are directly related to the July 2014 PIPE offering
and we reached our retention limit for that event during the second quarter of 2015. However, the insurance carrier has denied
coverage for these expenses on the grounds that the U.S. Securities and Exchange Commission subpoena does not constitute a “claim”
covered by the policy. We vigorously dispute the position of our insurance carrier and will continue to pursue coverage of our
legal expenses in this matter. If we are unsuccessful in obtaining coverage of our legal expenses, or cannot do so in a timely
manner, it will further materially and adversely affect our financial condition.
In addition to the direct investigation expense, the investigation
distracts the time and attention of our officers and directors, diverts resources away from our operations and has damaged, and
will continue to adversely impact, our reputation and relationships with shareholders, suppliers, customers and others.
On November 6, 2015, our wholly-owned subsidiaries Real Goods
Energy Tech, Inc., Real Goods Trading Corporation, Alteris Renewables, Inc., Real Goods Syndicated, Inc., Mercury Energy, Inc.,
Real Goods Solar, Inc.—Mercury Solar, Elemental Energy, LLC and Sunetric Management LLC entered into the Tenth Modification
Agreement with Silicon Valley Bank pursuant to which the parties thereto agreed to certain amendments to the SVB Loan.
The Tenth Modification Agreement removed the EBITDA-based financial
covenant in the SVB Loan and replaced it with a liquidity covenant. Before the Tenth Modification Agreement the borrowers under
the SVB Loan were obligated to achieve EBITDA (loss no worse than), measured quarterly, on a trailing three month basis, on a consolidated
basis, of the following amounts for each period ending as of the date indicated below:
Quarterly Period Ending (measured on a trailing three month basis) | |
EBITDA (loss no worse than) | |
March 31, 2015 | |
$ | (7,500,000 | ) |
June 30, 2015 | |
$ | (3,000,000 | ) |
September 30, 2015 | |
$ | (2,000,000 | ) |
December 31, 2015 | |
$ | (1,500,000 | ) |
March 31, 2016 | |
$ | (2,100,000 | ) |
Under the liquidity covenant replacing the above EBITDA-based
covenant, the borrowers are required to maintain, commencing on November 30, 2015 and thereafter, at all times, certified monthly
by Borrower, the sum of (i) unrestricted cash at Silicon Valley Bank plus (ii) the unused Availability Amount (as defined in the
SVB Loan) in an amount equal to or greater than $2,500,000.
In the Tenth Modification Agreement, Silicon Valley Bank also
waived the borrowers’ failure to comply with the minimum EBITDA financial covenant contained in Section 6.9(a) of the SVB
Loan for the compliance period ended September 30, 2015.
In connection with the Tenth Modification Agreement, the borrowers
are obligated to pay to Silicon Valley Bank a $75,000 non-refundable fee payable on or before the earlier to occur of (i) receipt
by borrowers of net proceeds from the issuance of additional equity securities of borrowers; and (ii) December 31, 2015. Borrowers
are also obligated to reimburse Silicon Valley Bank for all legal fees and expenses incurred in connection with the SVB Amendment.
Exhibit
No. |
|
Description |
|
|
10.1 |
|
Form of Exchange Agreement, dated June 25, 2015, between Real Goods Solar, Inc. and certain holders of Series A Warrants and Series C Warrants (Incorporated by reference to Exhibit 10.3 to Real Goods Solar’s Quarterly Report on Form 10-Q filed August 10, 2015 (Commission File No. 001-34044)) |
|
|
|
31.1* |
|
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
|
|
|
31.2* |
|
Certification of the Principal Accounting Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
|
|
32.1** |
|
Certification of the Chief Executive Officer and Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
32.2** |
|
Certification of the Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
101.INS |
|
XBRL Instance Document. |
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema. |
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase. |
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase. |
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase. |
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
|
Real Goods Solar, Inc. |
|
(Registrant) |
|
|
|
|
Date: November 9, 2015 |
By: |
|
/s/ Dennis Lacey |
|
|
|
Dennis Lacey |
|
|
|
Chief Executive Officer
(principal executive officer and acting principal financial
officer) |
|
|
|
|
Date: November 9, 2015 |
By: |
|
/s/ Alan Fine |
|
|
|
Alan Fine |
|
|
|
Treasurer and Principal Accounting Officer |
EXHIBIT INDEX
Exhibit
No. |
|
Description |
|
|
10.1 |
|
Form of Exchange Agreement, dated June 25, 2015, between Real Goods Solar, Inc. and certain holders of Series A Warrants and Series C Warrants (Incorporated by reference to Exhibit 10.3 to Real Goods Solar’s Quarterly Report on Form 10-Q filed August 10, 2015 (Commission File No. 001-34044)) |
|
|
|
31.1* |
|
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
|
|
|
31.2* |
|
Certification of the Principal Accounting Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
|
|
32.1** |
|
Certification of the Chief Executive Officer and Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
32.2** |
|
Certification of the Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
101.INS |
|
XBRL Instance Document. |
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema. |
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase. |
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase. |
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase. |
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase. |
Exhibit 31.1
CERTIFICATION
I, Dennis Lacey, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Real Goods Solar, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 9, 2015
|
/s/ Dennis Lacey |
|
Dennis Lacey |
|
Chief Executive Officer
(principal executive officer and acting principal financial
officer) |
Exhibit 31.2
CERTIFICATION
I, Alan Fine, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Real Goods Solar, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 9, 2015
|
/s/ Alan Fine |
|
Alan Fine |
|
Treasurer and Principal Accounting Officer |
Exhibit 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C.
SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of
Real Goods Solar, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015, as filed with the U.S.
Securities and Exchange Commission on the date hereof (the “Report”), I, Dennis Lacey, Chief Executive Officer and
acting Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
|
(1) |
The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 9, 2015
|
/s/ Dennis Lacey |
|
Dennis Lacey |
|
Chief Executive Officer
(principal executive officer and acting principal financial
officer) |
A signed original of this written statement
required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the U.S. Securities
and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATIONS PURSUANT TO 18 U.S.C.
SECTION 1350
In connection with the Quarterly Report of
Real Goods Solar, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015, as filed with the U.S.
Securities and Exchange Commission on the date hereof (the “Report”), I, Alan Fine, Treasurer and Principal Accounting
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:
|
(1) |
The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 9, 2015
|
/s/ Alan Fine |
|
Alan Fine |
|
Treasurer and Principal Accounting Officer |
A
signed original of this written statement required by Section 906 has been provided to the Company and will be retained by
the Company and furnished to the U.S. Securities and Exchange Commission or its staff upon request.