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 June 30, 2016, the interim results of operations for
the three and six months ended June 30, 2016 and 2015, and cash flows for the six months ended June 30, 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. 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.
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 Note Offering”) of which
$8.25 million is held in restricted accounts as of June 30, 2016.
In addition, the Company has filed a Form S-1 registration
statement with the U.S. Securities and Exchange Commission to register the offer and sale of convertible preferred stock, Series
H warrants and shares of Class A common stock issuable pursuant to the terms of such preferred stock and warrants. The U.S. Securities
and Exchange Commission has not yet declared the registration statement effective.
On May 25, 2016, the Company issued 29,082 shares of Class
A common stock to Solar Solutions in payment of $167,513 due under the Amended and Restated Loan Agreement with Solar Solutions
made as of March 31, 2016. See Note 3 below.
As discussed in Note 13, Subsequent Events, on August 22, 2016,
we executed a Second Loan Modification Agreement with Solar Solutions to extend the eligibility of certain receivables in the borrowing
base.
The Company has arranged for significant capital to be
realized by the Company from (i) the conversion of convertible notes to common stock commencing October 1, 2016 and (ii) from the
proceeds from the offering of convertible preferred stock and warrants, as and when the registration statement may be declared
effective by the Securities and Exchange Commission and as and if the offering is successful.
The Company has prepared its business plan for 2016,
and as described below, believes if it successfully executes the 2016 business plan, would have sufficient financial resources
to operate for the ensuing 12-month period. The Company objectives in preparing this plan included 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 thereby reducing the Company’s present operating losses in an effort to return 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 realized as of June 30, 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 through the first half of 2016 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 to be realized from its recent Form S-1 Registration Statement as described
above, (ii) additional capital from the release of portions of the $8.25 million in cash currently in collateral accounts from
the 2016 Note Offering, and (iii) 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 have the
anticipated access to additional financial capital as described above, and therefore unable to successfully implement its 2016
business plan, 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 six months ended June 30, 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 and six months ended June 30, 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.
Derivative Liabilities
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 Company accounts for some of its financial instruments
under ASC 815,
Derivatives and Hedging,
and accordingly separate accounting recognition is provided for embedded derivatives
within a financial instrument.
The following table reflects original assumptions
at 4/1/2016 and at quarter end 6/30/2016 for embedded derivative liabilities issued in the 2016 Note Offering
|
|
Exercise
Price
|
|
Closing
Market
Price
(average)
|
|
|
Risk-free
Rate
|
|
|
Market
Price
Volatility
|
|
|
Remaining
Term (years)
|
|
|
Probability of
change in
control
|
|
Embedded Derivative 04/01/2016
|
|
variable
|
|
$
|
14.600
|
|
|
|
0.90
|
%
|
|
|
49.0
|
%
|
|
|
3.0
|
|
|
|
15.0
|
%
|
Embedded Derivative 06/30/2016
|
|
variable
|
|
$
|
4.285
|
|
|
|
0.71
|
%
|
|
|
49.0
|
%
|
|
|
2.75
|
|
|
|
15.0
|
%
|
The following table reflects assumptions for common stock warrants
accounted for as derivative liabilities and embedded derivative liabilities outstanding as of June 30, 2016.
|
|
2013 & 2014
Issuances
|
|
|
2015
Issuances
|
|
|
Total
|
|
Derivative warrants outstanding at December 31, 2015
|
|
|
31,410
|
|
|
|
13,736
|
|
|
|
45,146
|
|
Issuances
|
|
|
-
|
|
|
|
1,034
|
|
|
|
1,034
|
|
Anti-dilution adjustments
|
|
|
380
|
|
|
|
112
|
|
|
|
492
|
|
Exchanged for common stock
|
|
|
-
|
|
|
|
(9,291
|
)
|
|
|
(9,291
|
)
|
Exercised/expired
|
|
|
-
|
|
|
|
(4,030
|
)
|
|
|
(4,030
|
)
|
Derivative warrants outstanding at June 30, 2016
|
|
|
31,790
|
|
|
|
1,561
|
|
|
|
33,351
|
|
|
|
2013 & 2014
Issuances
|
|
|
2015
Issuances
|
|
|
2016
|
|
|
Total
|
|
Fair value of derivatives at December 31, 2015
|
|
$
|
193
|
|
|
$
|
149
|
|
|
$
|
-
|
|
|
$
|
342
|
|
Adjustment for warrants exercised/extinguished
|
|
|
-
|
|
|
|
(103
|
)
|
|
|
-
|
|
|
|
(103
|
)
|
Fair value of embedded derivatives in convertible note
|
|
|
-
|
|
|
|
-
|
|
|
|
2,616
|
|
|
|
2,616
|
|
Changes in fair value, net
|
|
|
(109
|
)
|
|
|
(41
|
)
|
|
|
(117
|
)
|
|
|
(267
|
)
|
Fair value of derivatives at June 30, 2016
|
|
$
|
84
|
|
|
$
|
5
|
|
|
$
|
2,499
|
|
|
$
|
2,588
|
|
To reflect changes in the fair values of its outstanding warrants
and embedded derivatives, the Company recorded to its derivative liabilities, a net noncash decrease of $0.3 million and
a decrease of $4.5 million during the three months ended June 30, 2016 and 2015, respectively and noncash decreases of $0.3 million
and $6.3 million during the six months ended June 30, 2016 and 2015, 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 Company used 10,000 simulations in the Monte Carlo pricing model
to value the warrants and the embedded derivative in the convertible note. 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 and embedded derivative are reflected in the consolidated statement of operations as change in fair value of derivative
liabilities, with an offsetting non-cash entry recorded as an adjustment to the derivative 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 June 30, 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
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89
|
|
Embedded derivative liability
|
|
|
2,499
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,499
|
|
Total fair value
|
|
$
|
2,588
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,588
|
|
For the Company’s Level 3 measures, 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 derivative liabilities measured at fair value on a recurring basis using significant
unobservable inputs (i.e. Level 3) for the three months ended June 30, 2016:
(in thousands)
|
|
Fair Value
Measurements
Using Significant
Unobservable
Inputs
|
|
Fair value of derivative liabilities at December 31, 2015
|
|
$
|
342
|
|
Change in the fair value of derivative liabilities, net
|
|
|
(267
|
)
|
Adjustment for warrants exercised/extinguished
|
|
|
(103
|
)
|
Issuance of convertible notes containing embedded derivative
|
|
|
2,616
|
|
|
|
|
|
|
Fair value of derivative liabilities at June 30, 2016
|
|
$
|
2,588
|
|
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 2015-03
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 has adopted this standard and the convertible debt is presented net of discount and issuance costs on its condensed
consolidated balance sheet.
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 an 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.
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, 2018 and it is assessing the impact on its consolidated financial statements.
3. Line of Credit
On January 19, 2016 the Company entered into a waiver
and consent agreement with SVB in which it consented to the assignment of the revolving credit facility to 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.
On May 25, 2016, the Company entered into the First
Loan Modification Agreement, effective as of May 19, 2016, with Solar Solutions to amend the terms of the Loan (the “Modification
Agreement”). The Modification Agreement amends the Loan to, among other things, (i) reschedule the payment of $167,513.41
due on May 15, 2016 to a date on or before June 3, 2016 and (ii) require the Company to issue Solar Solutions 29,082
shares
of its Class A Common Stock (the “Shares”) at a price of $5.76 per share as a payment on the revolving line of credit
under the Loan.
Generally, the Loan provides for advances not to exceed a maximum amount based upon a borrowing base availability
of 75.0% of eligible accounts receivable and a variable rate 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 4.0%, plus 3.0%, and (b) 7.0%. 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.
On August 22, 2016, Solar Solutions confirmed to
the Company that Solar Solutions had agreed to amend the Loan to provide for the extension of the time period in which certain
of the Company’s accounts receivable were available at the rate of 100% for Loan advances. This Second Modification Agreement
extends the advance rate of such Company accounts receivable until October 1, 2016. The advance rate under the Loan for these accounts
receivable declines after that date and migrate to a 0% advance rate at December 1, 2016.
As of June 30, 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 7.0% and 8.0% per annum, respectively.
4. Related Party Transactions
Riverside is currently the Company’s largest
shareholder and held approximately 12.7% of the Company’s issued and outstanding shares of Class A common stock as of June
30, 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 June 30, 2016:
(in thousands)
|
|
|
|
|
2016
|
|
$
|
383
|
|
2017
|
|
|
385
|
|
2018
|
|
|
343
|
|
2019
|
|
|
266
|
|
2020 and thereafter
|
|
|
578
|
|
|
|
$
|
1,955
|
|
The Company incurred rent expense of $0.2 million
and $0.3 million for the three months ended June 30, 2016 and 2015, respectively and $0.4 million and $0.6 million for the six
months ended June 30, 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; contractual matters including warranty claims in the discontinued large commercial segment; 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.
6. Convertible Debt
2016 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 April
1, 2019 (the “Notes”) and one Series G warrant to purchase a fraction of one share of Class A common stock. 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 248,973 shares of Class A common stock. The Company has reserved up to 5,500,000 shares of Class A common stock for issuance
pursuant to the terms of the Notes and may adjust such share reserve periodically to reflect the terms of the Notes.
In accordance with relevant accounting guidance for debt with
conversion and other options, the Company separately accounts for the liability and equity components of the Notes by allocating
the proceeds between the liability component, and equity component over their relative fair values after initially allocating
the fair value of the embedded conversion option. The equity component of the Notes and the embedded derivative liability are
recognized as a debt discount on the issuance date. The debt discount, is amortized to interest expense using the effective interest
method over three years, or the life of the Notes.
In connection with the issuance of the Notes, the Company incurred
approximately $1.4 million of debt issuance costs, which primarily consisted of underwriting, legal and other professional fees,
and allocated these costs to the liability component of the host debt instrument, and is recorded as a contra account to the debt
liability on the balance sheet. The amount allocated to the liability component is amortized to interest expense over the contractual
life of the Convertible Notes using the effective interest method.
The Company’s outstanding convertible
note balances as of June 30, 2016 consisted of the following (in thousands):
|
|
June 30, 2016
|
|
Liability component:
|
|
|
|
|
Principal
|
|
$
|
10,000
|
|
Less: debt discount, net
|
|
|
(4,146
|
)
|
Less: debt issuance costs, net
|
|
|
(1,215
|
)
|
Net carrying amount
|
|
$
|
4,639
|
|
As of June 30, 2016, the carrying value of the Convertible
Notes was $4.6 million. The effective interest rate on the liability component was 58% for the period from the date of issuance
through June 30, 2016. The following table sets forth total interest expense recognized related to the Convertible Notes
during the three and six months ended June 30, 2016 (in thousands):
|
|
Three Months Ended
June 30, 2016
|
|
|
Six Months Ended
June 30, 2016
|
|
Contractual interest expense
|
|
$
|
200
|
|
|
$
|
200
|
|
Amortization of debt issuance costs
|
|
|
141
|
|
|
|
141
|
|
Amortization of debt discount
|
|
|
482
|
|
|
|
482
|
|
Total interest expense on Convertible Notes
|
|
$
|
823
|
|
|
$
|
823
|
|
As of June 30, 2016 the Company has received $1.75
million of the proceeds from the sale of the units from the 2016 Note Offering in unrestricted cash. The remaining proceeds of
$8.25 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, the 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 entered into separate termination and amendment agreements with the investors in the 2016 Note
Offering pursuant to which the parties terminated the registration rights agreement entered into in connection with the 2016 Note
Offering and 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.
At the Company’s scheduled shareholder meeting on May 27, 2016, voters approved the issuance of Class A common stock in
exchange for Notes and Series G warrants issued in the 2016 Note Offering.
The Notes are convertible at any time, at the option
of the holders, into shares of Common Stock at the lower of a fixed and floating conversion price. The initial fixed conversion
price is $16.07 per share, subject to adjustment for stock splits and similar events. The floating conversion price is equal to
the lowest of (i) 85% of the arithmetic average of the five lowest volume-weighted average prices of the Common Stock during the
20 consecutive trading day period ending on the trading day immediately preceding the delivery of the applicable conversion notice
by such holder of Notes, (ii) 85% of the volume-weighted average price of the Common Stock on the trading day immediately preceding
the delivery of the applicable conversion notice by such holder of Notes, and (iii) 85% of the volume-weighted average price of
the Common Stock on the trading day of the delivery of the applicable conversion notice by such holder of Notes.
Under terms of the Notes, principal and interest
payments have been deferred until November 1, 2016 at which time, interest accrued at 8% per annum is due in full and thereafter,
the Company shall make 28 equal monthly principal payments of approximately $ 0.36 million plus accrued interest. The Company
has the option to make such principal and interest payments, in whole or in part, through the exchange of its Common Stock at
the floating conversion price previously described. At June 30, 2016, the Company had accrued interest of $0.2 million included
in accrued liabilities on the Condensed Balance Sheet.
7. Shareholders’ Equity
The following transactions were completed
during the six months ended June 30, 2016:
2016 Note Offering
In connection with the issuance of
the Notes, the Company issued Series G warrants exercisable into 291,298 shares of Class A common stock. The fair value of Warrants
issued was $3.5 million and is recorded in Equity. The following table reflects original assumptions at 4/1/2016 for Series G
Warrants issued in the 2016 Note Offering
|
|
Exercise
Price
|
|
|
Closing
Market
Price
|
|
|
Risk-free
Rate
|
|
|
Market
Price
Volatility
|
|
|
Remaining
Term (years)
|
|
Series G Warrant
|
|
$
|
16.56
|
|
|
$
|
14.20
|
|
|
|
1.240
|
%
|
|
|
121.21
|
%
|
|
|
5.0
|
|
June 2016 Reverse Stock Split
On June 2, 2016, 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 27, 2016. 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.
Option and Warrant Exercises
During the three and six months ended June 30, 2016 and 2015,
the Company issued no shares of its Class A common stock to employees upon the exercise of stock options. During the six
months ended June 30, 2016 and 2015 the Company issued 2,067 and 150,794 shares of its Class A common stock pursuant to the
exercise of warrants and additional equity funding, respectively.
At June 30, 2016, the Company had the following shares of Class A
common stock reserved for future issuance:
Stock options and grants outstanding under incentive plans
|
|
|
5,840
|
|
Common stock warrants outstanding - derivative liability
|
|
|
33,350
|
|
Common stock warrants outstanding - equity security
|
|
|
318,573
|
|
|
|
|
|
|
Total shares reserved for future issuance
|
|
|
357,763
|
|
8. Share-Based Compensation
During the six months ended June 30, 2016, the Company did
not grant any stock options and cancelled 612 stock options versus grants of 4,262 stock options and cancellations of 1,853 stock
options during the six months ended June 30, 2015, under its 2008 Long-Term Incentive Plan, as amended. The new stock options
vest at 2% per month for the 50 months beginning with the first day of the eleventh month after date of grant.
Total share-based compensation expense recognized was $0.2
million and $0.2 million during the three months ended June 30, 2016 and 2015, respectively, and $0.3 million and $0.4 million
during the six months ended June 30, 2016 and 2015, respectively. Share-based compensation expense is reported separately on the
Company’s condensed consolidated statements of operations.
9. 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 six months ended June 30, 2016 and 2015, increased its valuation allowance by $2.4 million and $3.0 million, respectively.
The Company recognized $27,000 income tax expense for states during the three and six months ended June 30, 2016 and $41,000 and
a benefit of $24,000 as of the three and six months ended June 30, 2015, respectively.
10. Net Income (Loss) Per Share
Basic net income/(loss) per share excludes any dilutive effects
of options or warrants. The Company computes basic net income/(loss) per share using the weighted average number of shares of
its Class A common stock outstanding during the period. The Company computes diluted net income/(loss) per share using the
weighted average number of shares of its Class A common stock and common stock equivalents outstanding during the period.
The Company excluded common stock equivalents of 3.3 million and 0.04 million for the three months ended June 30, 2016 and
2015, respectively, and 3.3 million and 0.04 million for the six months ended June 30, 2016 and 2015, respectively, from the computation
of diluted net loss per share because their effect was antidilutive.
The following table sets forth the computation of basic and
diluted net loss per share:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
$
|
(3,533
|
)
|
|
$
|
1,575
|
|
|
$
|
(7,345
|
)
|
|
$
|
(1,977
|
)
|
Income/(loss) from discontinued operations
|
|
|
70
|
|
|
|
(133
|
)
|
|
|
231
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(3,463
|
)
|
|
$
|
1,442
|
|
|
$
|
(7,114
|
)
|
|
$
|
(2,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic net loss per share
|
|
|
639
|
|
|
|
251
|
|
|
|
630
|
|
|
|
197
|
|
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
|
|
|
639
|
|
|
|
251
|
|
|
|
630
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
$
|
(5.53
|
)
|
|
$
|
6.27
|
|
|
$
|
(11.65
|
)
|
|
$
|
(10.04
|
)
|
Income/(loss) from discontinued operations
|
|
|
0.11
|
|
|
|
(0.53
|
)
|
|
|
0.37
|
|
|
|
(1.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(5.42
|
)
|
|
$
|
5.74
|
|
|
$
|
(11.28
|
)
|
|
$
|
(11.64
|
)
|
11. 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’ income/(loss) from operations (measures of profit or loss) to the
Company’s consolidated net income/(loss) are as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
3,296
|
|
|
$
|
11,110
|
|
|
$
|
7,048
|
|
|
$
|
17,967
|
|
Sunetric
|
|
|
1,588
|
|
|
|
3,617
|
|
|
|
2,775
|
|
|
|
7,370
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net revenue
|
|
|
4,884
|
|
|
|
14,727
|
|
|
|
9,823
|
|
|
|
25,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
(893
|
)
|
|
|
(509
|
)
|
|
|
(2,157
|
)
|
|
|
(2,978
|
)
|
Sunetric
|
|
|
(291
|
)
|
|
|
147
|
|
|
|
(1,089
|
)
|
|
|
(166
|
)
|
Other
|
|
|
(1,755
|
)
|
|
|
(2,625
|
)
|
|
|
(3,433
|
)
|
|
|
(5,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss from continuing operations
|
|
|
(2,939
|
)
|
|
|
(2,987
|
)
|
|
|
(6,679
|
)
|
|
|
(8,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of consolidated loss from operations to consolidated net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
8
|
|
|
|
238
|
|
|
|
17
|
|
|
|
348
|
|
Interest expense
|
|
|
(884
|
)
|
|
|
(144
|
)
|
|
|
(952
|
)
|
|
|
(369
|
)
|
Change in valuation of derivative liabilities
|
|
|
309
|
|
|
|
4,509
|
|
|
|
267
|
|
|
|
6,264
|
|
Income tax (expense)/benefit
|
|
|
(27
|
)
|
|
|
(41
|
)
|
|
|
(27
|
)
|
|
|
24
|
|
Income/(loss) from discontinued operations, net of tax
|
|
|
70
|
|
|
|
(133
|
)
|
|
|
231
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(3,463
|
)
|
|
$
|
1,442
|
|
|
$
|
(7,143
|
)
|
|
$
|
(2,292
|
)
|
The following is a reconciliation of reportable segments’
assets to the Company’s consolidated total assets. The Other segment includes certain unallocated corporate amounts.
(in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Total assets – continuing operations:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
6,692
|
|
|
$
|
9,229
|
|
Sunetric
|
|
|
2,230
|
|
|
|
3,041
|
|
Other
|
|
|
9,650
|
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,572
|
|
|
$
|
13,304
|
|
|
|
|
|
|
|
|
|
|
Total assets – discontinued operations:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3,398
|
|
|
|
3,731
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,970
|
|
|
$
|
17,035
|
|
12. 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
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Major line items constituting pretax loss of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
123
|
|
|
$
|
486
|
|
|
$
|
346
|
|
|
$
|
909
|
|
Cost of goods sold
|
|
|
17
|
|
|
|
331
|
|
|
|
30
|
|
|
|
579
|
|
Selling and operating
|
|
|
30
|
|
|
|
190
|
|
|
|
73
|
|
|
|
450
|
|
General and administrative
|
|
|
6
|
|
|
|
34
|
|
|
|
12
|
|
|
|
108
|
|
Restructuring costs
|
|
|
—
|
|
|
|
31
|
|
|
|
—
|
|
|
|
31
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
33
|
|
|
|
—
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income/(loss) of discontinued operations
|
|
|
70
|
|
|
|
(133
|
)
|
|
|
231
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) on discontinued operations
|
|
$
|
70
|
|
|
$
|
(133
|
)
|
|
$
|
231
|
|
|
$
|
(315
|
)
|
The following is a reconciliation of the carrying amounts of
major classes of assets and liabilities of the discontinued operations to the total assets and liabilities of the discontinued
operations presented separately in the condensed consolidated balance sheets as indicated:
(in thousands)
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of assets included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
2,044
|
|
|
$
|
1,560
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
504
|
|
|
|
1,105
|
|
Inventory, net
|
|
|
58
|
|
|
|
112
|
|
Other current assets
|
|
|
57
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Total major classes of current assets of the discontinued operations
|
|
|
2,663
|
|
|
|
2,853
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
735
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets of discontinued operations
|
|
|
735
|
|
|
|
878
|
|
|
|
|
|
|
|
|
|
|
Total assets of the discontinued operations in the balance sheet
|
|
$
|
3,398
|
|
|
$
|
3,731
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,801
|
|
|
$
|
1,978
|
|
Accrued liabilities
|
|
|
2,237
|
|
|
|
2,394
|
|
Deferred revenue and other current liabilities
|
|
|
121
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities of discontinued operations
|
|
|
4,159
|
|
|
|
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
|
|
$
|
4,384
|
|
|
$
|
4,735
|
|
13. Subsequent Events
On July 21, 2016, the company filed an amendment to its registration
statement on Form S-1 with the SEC for convertible preferred stock and warrants. The SEC has not yet declared the registration
statement effective. The Company intends to pursue the offering registered under the registration statement, but cannot predict
with any degree of accuracy whether it will be able to accomplish the offering.
On August 22, 2016, we executed a Second Loan Modification Agreement
with Solar Solutions pursuant to which the dates for inclusion of certain receivables in the borrowing base have been extended.
See Note 3 above.