We have prepared our unaudited interim condensed consolidated
financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.
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 March 31, 2016, the interim results of operations
for the three months ended March 31, 2016 and 2015, and cash flows for the three months ended March 31, 2016 and 2015. These interim
statements have not been audited. The balance sheet as of December 31, 2015 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,
2015.
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 Company has experienced recurring operating losses and
negative cash flow from operations in recent years. As a result of these losses:
|
•
|
The Company was in technical default of certain covenants
contained in its credit facility with Silicon Valley Bank (“SVB”) both as
of December 31, 2015 and as of December 31, 2014. As discussed in Note 3. Revolving
Line of Credit, Solar Solutions and Distribution, LLC, a Colorado-based renewable energy
solutions company (“Solar Solutions”) acquired SVB’s loan to the Company
on January 19, 2016 and the Company obtained a waiver of the technical defaults at that
time. On that date the loan was further modified providing the Company with improved
terms, such as an expanded definition of the loan’s borrowing base.
|
|
•
|
The Company did not pay vendors on a timely basis and,
accordingly, experienced difficulties obtaining credit terms from its equipment suppliers.
|
The Company, starting with the fourth quarter of 2014, implemented
measures to reduce its cash outflow from operations. These measures included (i) exiting the large commercial segment which
was operating at both an operating and cash flow loss, (ii) reducing staffing levels, (iii) raising prices for its products
and (iv) efforts to enhance accounts receivable collections and optimize inventory levels. Although the Company was successful
in reducing its cash used in operations (both continuing and discontinued operations), technical defaults with SVB described above
and limited vendor terms that limited the Company’s ability to convert its backlog in an expeditious manner, resulted in
customer cancellations of contracts. As a result of these circumstances, the Company arranged for additional financial capital
as discussed below.
During 2015, the Company raised aggregate proceeds of $15.0
million in two capital raising transactions. As discussed in Note 6. Shareholders’ Equity, on April 1, 2016 the Company issued
$10.0 million of convertible notes and Series G warrants, raising net proceeds of $9.4 million (the “2016 Offering”).
Under the terms of a registration rights agreement entered into in conjunction with the 2016 Offering, the Company was required
to file a registration statement with the Securities and Exchange Commission registering for resale the maximum number of shares
of Class A common stock issuable pursuant to the terms of the convertible notes and Series G warrants. Upon the effectiveness of
the resale registration statement, the Company anticipated, based upon the schedule for releases of cash from the restricted collateral
accounts, that the expected amount and timing of cash receipts would allow the Company to execute its 2016 business plan. On May
12, 2016, the Company agreed to request withdrawal of its registration statement and in exchange the investors in the 2016
Offering (the “Investors”) agreed (i) to release $1 million from the collateral accounts on the 3
rd
business
day following the Company’s filing of a Current Report on Form 8-K disclosing that it has received shareholder approval pursuant
to NASDAQ Rule 5635(d) to issue shares of Class A common stock pursuant to the terms of the Notes without giving effect
to the exchange cap set forth therein in an amount that may exceed 20% of the Company’s issued and outstanding
shares of Class A common stock before the issuance of the Notes and the exercise of the Series G warrants without giving
effect to the exercise floor price set forth therein, (ii) the Company would be eligible for an additional release of $1 million
on the 5
th
day following the date the Investors are eligible to resell shares of Class A common stock pursuant to Securities
Act Rule 144, which is expected to be October 1, 2016; (iii) subsequent releases from the collateral accounts will occur
on the current schedule following the Rule 144 eligibility date; and (iv) the first payment of principal and interest under
the Notes would be due on November 1, 2016. The Company has scheduled a shareholder meeting on May 27, 2016 to seek the required
approval to issue shares of Class A common stock in exchange for the notes and Series G warrants issued in the 2016 Offering.
As a result of this change in circumstances, the amount and timing of the release of cash from the collateral accounts is different
than initially anticipated. The Company has engaged an investment banking firm with the goal of raising capital in the form of
debt or equity within the next 90 days in order to provide it with additional operating capital and as an element of its plan to
regain compliance with NASDAQ rules as discussed below. There can be no assurance that the Company will be successful in raising
capital. This report shall not constitute an offer to sell or the solicitation of an offer to buy any security.
The Company has prepared its business plan for 2016 and believes
it has sufficient financial resources to operate for the ensuing 12-month period from March 31, 2016. The Company objectives
in preparing this plan included (i) expanding the size of the Company’s sales and construction organizations to generate
gross margin that is in excess of its reduced fixed operating cost infrastructure and (ii) thereby reducing the Company’s
present operating losses and 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, of which substantially all had been achieved
by March 31, 2016, (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) hiring and training additional field and e-sales force personnel to
grow sales, (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,
(vi) realizing the benefits of new vendor terms negotiated by the Company during the last half of 2015 that will reduce the cost
of equipment acquired by the Company, (vii) increasing the sales and installations with small commercial customers, and (viii) continued
internal efforts to accelerate the conversion of the Company’s accounts receivable to cash. The Company believes that as
a result of (i) additional capital expected from the engagement of the investment banking firm described above, (ii) additional
capital from the release of portions of the $9.25 million in cash currently in collateral accounts from the 2016 Offering,
(iii) replacing SVB with Solar Solutions for its credit facility on improved terms for the ensuing 12 months, and (iv) the
actions it has already implemented to reduce its fixed operating cost infrastructure, the Company has sufficient financial resources
to operate for the ensuing 12 months. In the event the Company is unable to successfully implement its 2016 business plan or is
unable to either complete a capital raise as describe above or receive cash from the collateral accounts from the 2016 Offering
as anticipated, then the Company would attempt to enact further reductions in costs, which would have a materially adverse impact
on future operations.
2. Significant Accounting Policies
The Company made no changes to its significant accounting policies
during the three months ended March 31, 2016.
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 months ended March 31, 2016 are not necessarily indicative of the
expected results for the year ending December 31, 2016. 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, 2015. 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 2015 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.
To reflect changes in the fair values of its outstanding warrants
the Company recorded to its common stock warrant liability, a net noncash increase of $0.04 million during the three months ended
March 31, 2016 and a decrease of $1.8 million during the three months ended March 31, 2015. 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 three months ended March 31,
2016:
|
|
2013 & 2014
Issuances
|
|
|
2015
Issuances
|
|
|
Total
|
|
Warrants outstanding at December 31, 2015
|
|
|
628,204
|
|
|
|
274,728
|
|
|
|
902,932
|
|
Issuances
|
|
|
-
|
|
|
|
20,670
|
|
|
|
20,670
|
|
Anti-dilution adjustments
|
|
|
-
|
|
|
|
2,235
|
|
|
|
2,235
|
|
Exchanged for common stock
|
|
|
-
|
|
|
|
(185,831
|
)
|
|
|
(185,831
|
)
|
Exercised
|
|
|
-
|
|
|
|
(41,340
|
)
|
|
|
(41,340
|
)
|
Warrants outstanding at March 31, 2016
|
|
|
628,204
|
|
|
|
70,462
|
|
|
|
698,666
|
|
|
|
2013 & 2014
Issuances
|
|
|
2015
Issuances
|
|
|
Total
|
|
Value of warrants at December 31, 2015
|
|
$
|
193
|
|
|
$
|
149
|
|
|
$
|
342
|
|
Adjustment for warrants exercised/extinguished
|
|
|
-
|
|
|
|
(82
|
)
|
|
|
(82
|
)
|
Changes in fair value, net
|
|
|
68
|
|
|
|
(26
|
)
|
|
|
42
|
|
Value of warrants at March 31, 2016
|
|
$
|
261
|
|
|
$
|
41
|
|
|
$
|
302
|
|
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 March 31, 2016 (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
|
|
$
|
302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
302
|
|
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 three months ended March 31, 2016:
(in thousands)
|
|
Fair Value
Measurements
Using Significant
Unobservable
Inputs
|
|
Fair value of common stock warrant liability at December 31, 2015
|
|
$
|
342
|
|
Change in the fair value of common stock warrant liability, net
|
|
|
42
|
|
Adjustment for warrants exercised/extinguished
|
|
|
(82
|
)
|
|
|
|
|
|
Fair value of common stock warrant liability at March 31, 2016
|
|
$
|
302
|
|
Recently Issued Accounting Standards
ASU 2016-09
On March 30, 2016, the FASB issued
Accounting Standards Update 2016-09 (“ASU 2016-09”),
Simplifying Employee Share-Based Payment Accounting,
which
was issued to simplify some of the accounting guidance for share-based compensation. Among the areas impacted by the amendments
in this ASU is the accounting for income taxes related to share-based payments, accounting for forfeitures, classification of
awards as equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning
after December 15, 2016, with early adoption permitted. The Company expects to adopt this ASU on January 1, 2017. Management
is evaluating the impact that the adoption of this ASU will have on its consolidated financial position, results of operations
and cash flows.
ASU 2016-02
On February 25, 2016, the FASB issued Accounting Standards
Update No. 2016-02 (“ASU 2016-02”),
Leases,
which requires lessees to record a lease liability and right-of-use
asset on the consolidated balance sheet. While the new guidance for lessors is largely unchanged, sales-type leases must apply
a modified retrospective approach for leases existing at the earliest reported comparative period. The standard is effective for
financial statements issued for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is
permitted and the Company is assessing the impact of ASU 2016-02 on its condensed consolidated financial statements.
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, 2015. The Company is assessing the impact of ASU 2014-09 on its consolidated financial statements.
3. Revolving Line of Credit
On January 19, 2016 the Company entered into a waiver and consent
agreement with Silicon Valley Bank (“SVB”) in which it consented to the assignment of the revolving credit facility
to Solar Solutions and Distribution, LLC, a Colorado-based renewable energy solutions company (“Solar Solutions”),
and waived any claims against SVB. On January 19, 2016, Solar Solutions acquired the revolving credit facility from SVB.
On March 30, 2016 the Company entered into an Amended and Restated
Loan Agreement with Solar Solutions (the “Loan”) which, among other items, (i) extended the term to March 31, 2017,
and (ii) allowed for certain eligible inventories to be included in the borrowing base.
The Loan provides for advances not to exceed a maximum amount
based upon a borrowing base availability of 75% of eligible accounts receivable and 25% of eligible inventory as defined in the
Loan. The maximum amount of the Loan is currently $5.0 million, and is reduced to $4.0 million on October 1, 2016 and to $3.0
million on January 1, 2017. Borrowings bear interest at the greater of (a) the greater of the prime rate or 4.00%, plus 3.00%,
and (b) 7.00%. The amended maturity date for the Loan is currently March 31, 2017. The line of credit has a facility
fee of 2.0% per year of the average daily unused portion of the available line of credit and a loan administration and collateral
monitoring labor fee of $4,000 per month.
As of March 31, 2016 the Company had a balance outstanding
under the Loan of $4.1 million and as of December 31, 2015, the Company had a line of credit outstanding with SVB of $0.8 million,
accruing interest at 7% and 8% per annum, respectively.
4. Related Party Transactions
Riverside is currently the Company’s largest shareholder
and held approximately 13.4% of the Company’s issued and outstanding shares of Class A common stock as of March 31, 2016.
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 three 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 March 31, 2016:
(in thousands)
|
|
|
|
2016
|
|
$
|
578
|
|
2017
|
|
|
191
|
|
2018
|
|
|
87
|
|
2019 and thereafter
|
|
|
12
|
|
|
|
$
|
868
|
|
The Company incurred rent expense of $0.2 million and $0.3
million for the three months ended March 31, 2016 and 2015, 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 private offering
of approximately $7.0 million of its Class A common stock and warrants (the “July 2014 PIPE Offering”) at a price
per unit of $48.00 ($2.40 pre-reverse split). Subsequently, the Company’s stock price has declined to $0.63 as of December
31, 2015 and five of the investors that participated in the offering (out of approximately 20 total investors that participated
in the offering) asserted claims against the Company in three separate lawsuits alleging certain misrepresentations and omissions
in the offering. The Company subsequently reached settlements with all five 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. 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. The Company’s 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, but
has nevertheless agreed to advance funds to pay amounts we contend constitute defense costs, while reserving all rights, including
the right to recoup all amounts advanced. The Company vigorously disputes the position of the insurance carrier in this matter.
During the three months ended March 31, 2016, the insurance carrier advanced funds of $0.9 million that the Company has recorded
as Other liabilities on the Condensed Consolidated Balance Sheet as resolution of this matter is a gain contingency.
At this time, the Company is unable
to determine the potential impact, if any, that may 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.
6. Shareholders’ Equity
Employee Option Exercises, Warrant Exercises and Common
Stock Reserved for Future Issuances
During the three months ended March 31, 2016, and 2015 the
Company issued no shares of its Class A common stock to employees upon the exercise of stock options. During the three months
ended March 31, 2016 and 2015 the Company issued 260,028 and 1,451,100 shares of its Class A common stock pursuant to the
exercise or exchange of warrants and additional equity funding, respectively.
At March 31, 2016, the Company had the following shares of
Class A common stock reserved for future issuance:
Stock options and grants outstanding under incentive plans
|
|
|
143,550
|
|
Common stock warrants outstanding - derivative liability
|
|
|
698,666
|
|
Common stock warrants outstanding - equity security
|
|
|
545,505
|
|
|
|
|
|
|
Total shares reserved for future issuance
|
|
|
1,387,721
|
|
2016 Convertible Note Offering
On April 1, 2016, the Company entered into a securities purchase
agreement for a private placement of $10.0 million units, each consisting of $1 Senior Secured Convertible Notes due on March
31, 2019 (the “Notes”) and one Series G warrant to purchase a fraction of one share of Class A common stock (the “2016
Offering”). On the same day the Company closed the transaction and issued an aggregate of $10.0 million of notes and Series
G warrants exercisable into 4,979,460 shares of Class A common stock. The Company has reserved up to 61,500,000 shares of Class
A common stock for issuance pursuant to the terms of the Notes.
The Company received $0.75 million
of the proceeds from the sale of the units at closing of the 2016 Offering in unrestricted cash. The remaining proceeds of $9.25
million are held in five separate collateral accounts that are subject to Deposit Account Control Agreements between the Bank
of Hawaii, the Company, and the applicable investor. The Notes provided for distribution of the proceeds held pursuant to the
Deposit Account Control Agreement as described on Form 8-K filed on April 1, 2016, as amended. On May 12, 2016, Notes were amended
to provide for the release of cash from the collateral accounts as described in the following paragraph.
On May 12, 2016, the Company
agreed to request withdrawal of its registration statement and in exchange the investors in the 2016 offering (the “Investors”)
agreed (i) to release $1 million from the collateral accounts on the 3
rd
business day following the Company’s
filing of a Current Report on Form 8-K disclosing that it has received shareholder approval pursuant to NASDAQ Rule 5635(d)
to issue shares of Class A common stock pursuant to the terms of the Notes without giving effect to the exchange cap
set forth therein an amount that may exceed 20% of the Company’s issued and outstanding shares of Class A common stock
before the issuance of the Notes and the exercise of the Series G warrants without giving effect to the exercise floor price
set forth therein, (ii) the Company would be eligible for an additional release of $1 million on the 5
th
day following
the date the Investors are eligible to resell shares of Class A common stock pursuant to Securities Act Rule 144, which
is expected to be October 1, 2016; (iii) subsequent releases from the collateral accounts will occur on the current schedule
following the Rule 144 eligibility date; and (iv) the first payment of principal and interest under the Notes would be due
on November 1, 2016. The Company has scheduled a shareholder meeting on May 27, 2016 to seek the required approval to issue shares
of Class A common stock in exchange for Notes and Series G warrants issued in the 2016 Offering The Company has engaged an investment
banking firm with the goal of raising capital in the form of debt or equity within the next 90 days in order to provide it with
additional operating capital. There can be no assurance that the Company will be successful in raising Capital. This report shall
not constitute an offer to sell or the solicitation of an offer to buy and security.
7. Share-Based Compensation
During the three months ended March 31, 2016, the Company did
not grant any stock options and cancelled 3,129 stock options versus grants of 31,695 stock options and cancellations of 22,763
stock options during the three months ended March 31, 2015, 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, during the first quarter 2015, 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 $0.2
million during each of the three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016 and 2015, increased its valuation allowance by $1.2 million and $1.6 million, respectively.
The Company recognized no income tax benefit for losses incurred during the three months ended March 31, 2016.
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 1.4 million and 3.8 million for the three months ended March 31, 2016 and 2015, 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
March 31,
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
Net loss:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(3,812
|
)
|
|
$
|
(3,552
|
)
|
Income (loss) from discontinued operations
|
|
|
161
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,651
|
)
|
|
$
|
(3,734
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
Weighted average shares for basic net loss per share
|
|
|
12,431
|
|
|
|
2,871
|
|
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
|
|
|
12,431
|
|
|
|
2,871
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.30
|
)
|
|
$
|
(1.24
|
)
|
Income (loss) from discontinued operations
|
|
|
0.01
|
|
|
|
(0.06
|
)
|
Net loss
|
|
$
|
(0.29
|
)
|
|
$
|
(1.30
|
)
|
10. Segment Information
The Company 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 – corporate operations. The Company discontinued its former large
commercial segment and it is presented as discontinued operations.
Financial information for the Company’s segments and
a reconciliation of the total of the reportable segments’ loss from operations (measures of profit or loss) to the Company’s
consolidated net loss are as follows:
|
|
Three Months Ended
March 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
3,752
|
|
|
$
|
6,857
|
|
Sunetric
|
|
|
1,187
|
|
|
|
3,753
|
|
|
|
|
|
|
|
|
|
|
Consolidated net revenue
|
|
|
4,939
|
|
|
|
10,610
|
|
|
|
|
|
|
|
|
|
|
Loss from operations:
|
|
|
|
|
|
|
|
|
Residential
|
|
|
(1,264
|
)
|
|
|
(2,469
|
)
|
Sunetric
|
|
|
(798
|
)
|
|
|
(313
|
)
|
Other
|
|
|
(1,678
|
)
|
|
|
(2,475
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated loss from continuing operations
|
|
|
(3,740
|
)
|
|
|
(5,257
|
)
|
|
|
|
|
|
|
|
|
|
Reconciliation of consolidated loss from operations to consolidated net loss:
|
|
|
|
|
|
|
|
|
Other income
|
|
|
9
|
|
|
|
110
|
|
Interest expense
|
|
|
(39
|
)
|
|
|
(225
|
)
|
Change in valuation of warrants
|
|
|
(42
|
)
|
|
|
1,755
|
|
Income tax (expense)/benefit
|
|
|
-
|
|
|
|
65
|
|
Loss from discontinued operations, net of tax
|
|
|
161
|
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,651
|
)
|
|
$
|
(3,734
|
)
|
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)
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Total assets – continuing operations:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
7,395
|
|
|
$
|
9,229
|
|
Sunetric
|
|
|
2,830
|
|
|
|
3,041
|
|
Other
|
|
|
1,282
|
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,507
|
|
|
$
|
13,304
|
|
|
|
|
|
|
|
|
|
|
Total assets – discontinued operations:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3,460
|
|
|
|
3,731
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,967
|
|
|
$
|
17,035
|
|
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
March 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Major line items constituting pretax loss from discontinued operations:
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
223
|
|
|
$
|
423
|
|
Cost of goods sold
|
|
|
13
|
|
|
|
248
|
|
Selling and operating
|
|
|
43
|
|
|
|
260
|
|
General and administrative
|
|
|
6
|
|
|
|
74
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss) from discontinued operations
|
|
|
161
|
|
|
|
(182
|
)
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
161
|
|
|
$
|
(182
|
)
|
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)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of assets included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,471
|
|
|
$
|
1,560
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
1,105
|
|
|
|
1,105
|
|
Inventory, net
|
|
|
74
|
|
|
|
112
|
|
Other current assets
|
|
|
62
|
|
|
|
76
|
|
Total major classes of current assets of the discontinued operations
|
|
|
2,712
|
|
|
|
2,853
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
748
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets of discontinued operations
|
|
|
748
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
Total assets of the discontinued operations in the balance sheet
|
|
$
|
3,460
|
|
|
$
|
3,731
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,766
|
|
|
$
|
1,978
|
|
Accrued liabilities
|
|
|
2,285
|
|
|
|
2,394
|
|
Deferred revenue and other current liabilities
|
|
|
125
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities of discontinued operations
|
|
|
4,176
|
|
|
|
4,510
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
225
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
Total major classes of noncurrent liabilities of the discontinued operations
|
|
|
225
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of the discontinued operations in the balance sheet
|
|
$
|
4,401
|
|
|
$
|
4,735
|
|
12. Subsequent Events
See Note
1.
Organization, Nature of Operations, and Principles of Consolidation and
Note 6. Shareholders’ Equity for information
regarding the Company’s 2016 private placement and the recent changes thereto.