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 financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material respects, our condensed consolidated
financial position as of September 30, 2016, the interim results of operations for the three and nine months ended September 30,
2016 and 2015, and cash flows for the nine months ended September 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 10. 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 did not pay vendors on a timely basis and,
accordingly, experienced difficulties obtaining credit terms from its equipment suppliers that limited the Company’s ability
to convert its backlog in an expeditious manner, which resulted in customer cancellations of contracts.
The Company, starting with the fourth quarter of 2014, implemented
measures to reduce its cash outflow for operations such that the required level of sales to achieve break-even results was reduced.
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. As a result, for the nine months ended September 30, 2016, net cash used in operating activities from
continuing operations improved by $8.6 million compared to the nine months ended September 30, 2015.
As a result of these circumstances, the Company arranged for
additional financial capital:
|
•
|
On April 1, 2016, the Company issued $10.0 million of Senior Secured Convertible Notes due April
1, 2019 (each, a “Note”) and Series G warrants to purchase Class A common stock, raising net proceeds of approximately
$9.4 million (the “2016 Note Offering”) of which the Company has received $1.75 million as unrestricted cash as of
September 30, 2016. Through November 4, 2016, the Company has received aggregate unrestricted cash of $7.6 million, including $5.8
million which has been released from the restricted cash accounts after September 30, 2016.
|
|
•
|
On May 25, 2016, the Company issued 29,082 shares of Class A common stock to Solar Solutions
and Distribution, LLC (“Solar Solutions”) in payment of $167,513 due under the Amended and Restated Loan Agreement
with Solar Solutions.
|
|
•
|
On September 14, 2016, the Company issued $2.8 million
of convertible preferred stock and 509,091 Series H warrants. The Company received, after offering costs, $2.2 million in cash
at the closing, and received $1.6 million from the exercise of 285,454 Series H warrants on September 30, 2016.
|
Commencing October 3, 2016, principal and interest on
our Note began to convert into Class A common equity, with the following activity through November 4, 2016:
Amount of principal converted to Class A common stock
|
|
$
|
7.1
|
million
|
Releases of cash from restricted cash
|
|
$
|
5.8
|
million
|
Net increase in shareholders' equity from conversions
|
|
$
|
5.9
|
million
|
The Company has used the proceeds from the releases from the
restricted cash account to reduce accounts payable, purchase materials to convert its backlog to revenue, and for other corporate
purposes.
The Company has prepared its business plan for the ensuing twelve
months, and as described below, believes it has sufficient financial resources to operate for the ensuing 12-month period. The
Company’s 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
September 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 that will reduce the cost of materials acquired by the Company, (vii) increasing
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 realized through
November 4, 2016 as described above, (ii) additional capital realized from the release of the remaining $2.4 million of cash in
the restricted cash 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.
The Company is listed on Nasdaq and, accordingly, for continued
listing, must comply with Nasdaq’s minimum shareholders’ equity requirement of $2.5 million. To comply with the Nasdaq
requirement, the Company will need to undertake an equity offering.
2. Significant Accounting Policies
The Company made no changes to its significant accounting
policies during the nine months ended September 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 nine months ended September 30, 2016 are not necessarily indicative
of the expected results for the year ending December 31, 2016. These unaudited condensed 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 used 10,000 simulations in the Monte Carlo pricing
model to value the warrants and the embedded derivative in the Notes. 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 condensed 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. 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 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 April 1, 2016 and at September 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 April 2016
|
|
variable
|
|
$
|
14.600
|
|
|
|
0.90
|
%
|
|
|
49.0
|
%
|
|
|
3.0
|
|
|
|
15.0
|
%
|
Embedded Derivative September 2016
|
|
variable
|
|
$
|
2.2500
|
|
|
|
0.83
|
%
|
|
|
49.0
|
%
|
|
|
2.5
|
|
|
|
15.0
|
%
|
The table below summarizes the Company’s derivative warrant
activity, adjusted to reflect the one-for-twenty reverse stock split on June 2, 2016 for the nine months ended September 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
|
|
Contractual anti-dilution adjustments
|
|
|
203,691
|
|
|
|
112
|
|
|
|
203,803
|
|
Exchanged for Class A common stock
|
|
|
-
|
|
|
|
(9,291
|
)
|
|
|
(9,291
|
)
|
Exercised/expired
|
|
|
-
|
|
|
|
(4,030
|
)
|
|
|
(4,030
|
)
|
Derivative warrants outstanding at September 30, 2016
|
|
|
235,101
|
|
|
|
1,561
|
|
|
|
236,662
|
|
|
|
2013 & 2014
Issuances
|
|
|
2015
Issuances
|
|
|
2016
Issuances
|
|
|
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 Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
2,616
|
|
|
|
2,616
|
|
Changes in fair value, net
|
|
|
49
|
|
|
|
(43
|
)
|
|
|
262
|
|
|
|
268
|
|
Fair value of derivatives at September 30, 2016
|
|
$
|
242
|
|
|
$
|
3
|
|
|
$
|
2,878
|
|
|
$
|
3,123
|
|
Fair Value Measurement
ASC 820
, Fair Value Measurements
,
clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should
be determined based on assumptions that market participants would use in pricing an asset or a liability.
ASC 820 requires that the valuation
techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820
establishes a three-tier fair value hierarchy, which prioritizes inputs that may be used to measure fair value as follows:
|
•
|
Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
|
|
•
|
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities.
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
|
When determining the fair value measurements for assets or liabilities
required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market
in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When
possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in
active markets, the Company looks to market observable data for similar assets.
The following tables summarize
the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the condensed consolidated balance
sheets:
Balance at September 30, 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
|
|
$
|
245
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
245
|
|
Embedded derivative liability
|
|
|
2,878
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,878
|
|
Total fair value
|
|
$
|
3,123
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,123
|
|
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 inputs. The Company used a market approach to valuing these derivative liabilities. The following
table summarizes activity for the Company’s derivative liabilities measured at fair value on a recurring basis using significant
unobservable inputs (i.e. Level 3) for the nine months ended September 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
|
|
|
564
|
|
Adjustment for warrants exercised/extinguished
|
|
|
(103
|
)
|
Adjustments for extinguished preferred stock
|
|
|
(296
|
)
|
Issuance of Notes containing embedded derivative
|
|
|
2,616
|
|
|
|
|
|
|
Fair value of derivative liabilities at September 30, 2016
|
|
$
|
3,123
|
|
Recently Issued Accounting Standards
ASU 2016-15
On August 26, 2016, the FASB issued Accounting Standards Update
No. 2016-15 (“ASU 2016-15”),
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,
which was issued to provide clarification on how certain cash receipts and cash payments are reported in the statement of cash
flows. This
ASU
addresses eight specific cash flow issues in an effort to reduce
existing diversity between companies. The standard is effective for financial statements issued for fiscal years beginning after
December 15, 2017, and interim periods therein. Early adoption is permitted and the Company is assessing the impact of ASU 2016-15
on its condensed consolidated statements of cash flows.
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 ASU 2016-09 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 condensed 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 ASU 2015-03 and the convertible debt is presented net of discount and issuance costs on its condensed consolidated balance sheet.
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 condensed 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 condensed consolidated financial statements.
3. Line of Credit
On January 19, 2016, the Company entered into a waiver
and consent agreement with Silicon Valley Bank in which it consented to the assignment of the revolving credit facility to Solar
Solutions and waived any claims against Silicon Valley Bank. On January 19, 2016, Solar Solutions acquired the revolving credit
facility from Silicon Valley Bank.
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 “ First
Modification Agreement”). The First Modification Agreement amended 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 to Solar Solutions
29,082 shares of Class A common stock 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 $4.0 million, (it was automatically reduced
to $4.0 million on October 1, 2016 pursuant to the terms of the Loan) and it is reduced 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, the Company entered into the
Second Loan Modification Agreement, effective as of August 19, 2016, with Solar Solutions (the “Second Modification Agreement”).
The Second Loan Modification Agreement amended the Loan to delay the time periods at which reductions in the percentage value of
certain of the Company’s accounts receivable occurs for purposes of calculating the borrowing base under the Loan. As amended,
the value of each of the accounts receivable in question may be included in the borrowing base calculation (a) initially, 100%,
(b) beginning on the later of October 1, 2016 or 270 days after the applicable invoice date, 50%, and (c) beginning on the later
of November 30, 2016 or 360 days after the applicable invoice date, not at all. The impact of the amendment was to increase the
percentage of the value of such accounts receivable the Company was allowed to include in its borrowing base calculation.
4. 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 September 30, 2016:
(in thousands)
|
|
|
|
2016
|
|
$
|
189
|
|
2017
|
|
|
370
|
|
2018
|
|
|
379
|
|
2019
|
|
|
275
|
|
2020
|
|
|
260
|
|
2021 and thereafter
|
|
|
334
|
|
|
|
$
|
1,807
|
|
The Company incurred rent expense of $0.1 million
and $0.2 million for the three months ended September 30, 2016 and 2015, respectively and $0.5 million and $0.8 million for the
nine months ended September 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.
5. Convertible Debt and Convertible
Preferred Stock
2016 Note Offering
On April 1, 2016, the Company entered into a securities purchase
agreement for a private placement of 10 million units, each consisting of $1 of 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. Under the terms of the Notes, the Company
maintains a reserve of Class A common stock for issuance that is subject to adjustment periodically to reflect 200% of the potential
shares issuable. As of November 4, 2016, the Company has reserved up to 6,200,000 shares of Class A common stock for issuance pursuant
to 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 commissions and warrants, and 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 Notes using the effective interest method.
The Company’s outstanding Note balances
as of September 30, 2016 consisted of the following (in thousands):
|
|
September 30, 2016
|
|
Liability component:
|
|
|
|
|
Principal
|
|
$
|
10,000
|
|
Less: debt discount, net
|
|
|
(3,566
|
)
|
Less: debt issuance costs, net
|
|
|
(1,045
|
)
|
Net carrying amount
|
|
$
|
5,389
|
|
As of September 30, 2016, the carrying value of the Notes
was $5.4 million. The effective interest rate on the liability component was 58% for the period from the date of issuance through
September 30, 2016. The following table sets forth total interest expense recognized related to the Notes during the three
and nine months ended September 30, 2016 (in thousands):
|
|
Three Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 2016
|
|
Contractual interest expense
|
|
$
|
207
|
|
|
$
|
407
|
|
Amortization of debt issuance costs
|
|
|
170
|
|
|
|
311
|
|
Amortization of debt discount
|
|
|
580
|
|
|
|
1,062
|
|
Total interest expense on Notes
|
|
$
|
957
|
|
|
$
|
1,780
|
|
On April 1, 2016, the Company received $0.75 million
of the proceeds from the sale of the units from the 2016 Note Offering. The remaining proceeds of $9.25 million were deposited
into restricted cash accounts that are subject to Deposit Account Control Agreements between the Bank of Hawaii, the Company, and
the applicable investor. The Notes provide 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 restricted cash 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 restricted cash 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 occurred
on October 6, 2016; (iii) subsequent releases from the restricted cash 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.
As of September 30, 2016 the remaining proceeds in
the restricted cash account was $8.25 million. As of November 4, 2016 the remaining proceeds in the restricted cash account was
$2.4 million.
The Notes are convertible at any time, at the option
of the holders, into shares of Class A common stock at the lower of a fixed and floating conversion price. The initial fixed conversion
price was $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 Class A 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 Class A 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 Class A common stock on the trading day of the delivery of the applicable conversion notice by such holder of Notes.
The floating conversion price was $1.74 and, as permitted under the Notes, the Company has reduced the fixed conversion price on
several occasions or limited time periods in an effort to encourage conversion to (i) increase the shareholders’ equity of
the company and meet the Nasdaq’s minimum requirement for shareholders’ equity of the Company and (ii) to obtain at
an earlier date additional financial capital to commence its business turnaround strategy. Between October 18 and 28, 2016 the
Company reduced the conversion price to $1.35, between October 28 and November 1, 2016 the Company reduced the conversion price
to $1.00 (there were no subsequent conversions at this price), and between November 1 and 2, 2016 the Company reduced the conversion
price to $0.75. The average conversion price for the conversion of all Notes through November 4, 2016 was $1.41.
Under the 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, upon satisfaction of certain conditions, to make such principal and interest payments, in whole or in part, through
the issuance of Class A common stock at the floating conversion price previously described. At September 30, 2016, the Company
had accrued interest of $0.4 million included in accrued liabilities on the balance sheet.
2016 Convertible Preferred Stock offering
On September 14, 2016, pursuant to the terms of an Underwriting
Agreement, the Company sold to the underwriters an aggregate of 2,800 units (representing gross proceeds of $2,800,000) (each,
a “Unit”), each Unit consisting of one share of the Company’s Series A 12.5% Mandatorily Convertible Preferred
Stock, stated value $1,000 per share (the “Preferred Stock”) and convertible into shares of the Company’s Class
A common stock, , and one Series H Warrant to purchase approximately 181.8181 shares of Class A common stock at an exercise price
of $5.50. The Series H Warrants are exercisable immediately for a term of 5-years and include the following reprice adjustment
provision: If the Exercise Price on the earlier of the date of (i) repayment in full of the Notes and (ii) the maturity date of
the Notes (such earlier date, the “Adjustment Date”) exceeds eighty-five percent (85%) of the lowest Weighted Average
Price of the Common Stock during the five (5) consecutive Trading Day period ending on, and including, the Adjustment Date (the
“Adjusted Exercise Price”), the Exercise Price hereunder shall be reset to the Adjusted Exercise Price, subject to
further adjustment hereunder. The public offering price for each Unit was $1,000 and the underwriters’ discount was $70
per Unit. At the closing, the Company issued an aggregate of 2,800 shares of Preferred Stock and Series H Warrants exercisable
into an aggregate of 509,091 shares of Class A common stock.
In accordance with relevant accounting guidance for instruments
with conversion and other options, the Company separately accounts for the liability and equity components of the Units by
allocating the proceeds between the liability component, and equity component over their relative fair values. The equity component
of the Units is recognized as a debt discount on the issuance date. The debt discount has been fully amortized to expense as of
September 30, 2016, since all of the Preferred Stock has been converted to Class A common stock, and is included in Debt accretion
expense and loss on extinguishment.
In connection with the issuance of the Units, the Company incurred
approximately $0.6 million of issuance costs, which primarily consisted of underwriting commissions, legal and other professional
fees, and allocated these costs to the preferred stock liability component and the warrant equity component over their relative
fair values, and is recorded as a contra account to the debt liability and additional paid-in capital on the balance sheet. The
amount allocated to the liability component was fully amortized to expense as of September 30, 2016, since all of the Preferred
Stock has been converted to Class A common stock, and is included in Interest expense.
By September 29, 2016, all of the convertible preferred stock
was converted to Class A common stock, extinguishing the debt. As the trading price of the Company’s stock was higher at
conversion than the effective conversion price per share to the debt holder, the Company recorded a loss on extinguishment for
this 14-day period. As of September 30, 2016, the amount recorded as an increase to shareholders’ equity for the September
14, 2016 offering was equal to the cash received at the closing, net of costs, and upon subsequent exercises of Series H warrants
aggregating to $3.8 million.
The Convertible Preferred Stock was recorded as follows:
Statement of Changes in Stockholders' Deficit:
|
|
|
|
|
Fair Value of Preferred Stock Liability converted to common stock
|
|
$
|
4,324
|
|
Issuance of warrants for preferred stock offering
|
|
|
1,053
|
|
Proceeds from warrant exercises
|
|
|
1,570
|
|
Statement of Operations:
|
|
|
|
|
Amortization of debt discount and interest expense
|
|
|
(304
|
)
|
Debt extinguishment
|
|
|
(2,831
|
)
|
Increase in stockholders' deficit
|
|
$
|
3,812
|
|
Cash received from convertible preferred stock and warrants:
|
|
|
|
|
Preferred stock, net of costs
|
|
$
|
2,242
|
|
Warrants, net of costs
|
|
|
1,570
|
|
Increase in cash
|
|
$
|
3,812
|
|
6. Shareholders’ Equity
The following transactions were completed during
the nine months ended September 30, 2016:
2016 Convertible Preferred Stock offering
In connection with the issuance of
the September 14, 2016 Units, the Company issued Series H warrants exercisable into 509,091 shares of Class A common stock. The
fair value of the Series H warrants issued was $1.3 million and is recorded in Equity. The following table reflects original assumptions
as of September 14, 2016 for Series H Warrants issued in the 2016 Convertible Preferred Stock offering:
|
|
Exercise
Price
|
|
|
Closing
Market
Price
|
|
|
Risk-free
Rate
|
|
|
Market
Price
Volatility
|
|
|
Remaining
Term (years)
|
|
Series H Warrant
|
|
$
|
5.50
|
|
|
$
|
4.88
|
|
|
|
1.210
|
%
|
|
|
127.60
|
%
|
|
|
5.0
|
|
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 the
Series G warrants issued was $3.5 million and is recorded in Equity. The following table reflects original assumptions as of April
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 nine months ended September 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
nine months ended September 30, 2016 and 2015, the Company issued 287,521 and 3,021,581 shares of its Class A common stock
pursuant to the exercise of warrants and capital raising transactions, respectively.
At September 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
|
|
|
5,263
|
|
Common stock warrants outstanding - derivative liability
|
|
|
236,662
|
|
Common stock warrants outstanding - equity security
|
|
|
542,205
|
|
|
|
|
|
|
Total shares reserved for future issuance
|
|
|
784,130
|
|
7. Share-Based Compensation
During the nine months ended September 30, 2016, under its 2008
Long-Term Incentive Plan, as amended, the Company did not grant any stock options and cancelled 1,021 stock options versus grants
of 5,008 stock options and cancellations of 3,901 stock options during the nine months ended September 30, 2015. Substantially
all 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 $0.1 million during the three months ended September 30, 2016 and 2015, respectively, and $0.5 million and $0.5 million
during the nine months ended September 30, 2016 and 2015, respectively. Share-based compensation expense is reported separately
on the Company’s condensed consolidated statements of operations.
8. Net Income (Loss) Per Share
Basic net income/(loss) per share excludes any dilutive effects
of options, warrants or the Notes. 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 6.5 million and 1.6 million for the nine months ended September 30,
2016 and 2015, respectively, from the computation of diluted net loss per share because their effect was antidilutive.
9. 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 loss are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
1,427
|
|
|
$
|
6,894
|
|
|
$
|
8,475
|
|
|
$
|
24,861
|
|
Sunetric
|
|
|
1,036
|
|
|
|
3,544
|
|
|
|
3,811
|
|
|
|
10,914
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consolidated net revenue
|
|
|
2,463
|
|
|
|
10,438
|
|
|
|
12,286
|
|
|
|
35,775
|
|
Income/(loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
(1,399
|
)
|
|
|
(1,809
|
)
|
|
|
(3,556
|
)
|
|
|
(4,787
|
)
|
Sunetric
|
|
|
(100
|
)
|
|
|
114
|
|
|
|
(1,189
|
)
|
|
|
(52
|
)
|
Other
|
|
|
(1,539
|
)
|
|
|
(2,864
|
)
|
|
|
(4,972
|
)
|
|
|
(7,964
|
)
|
Consolidated loss from continuing operations
|
|
|
(3,038
|
)
|
|
|
(4,559
|
)
|
|
|
(9,717
|
)
|
|
|
(12,803
|
)
|
Reconciliation of consolidated loss from operations to consolidated net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
—
|
|
|
|
74
|
|
|
|
17
|
|
|
|
422
|
|
Interest expense
|
|
|
(1,330
|
)
|
|
|
(54
|
)
|
|
|
(2,253
|
)
|
|
|
(423
|
)
|
Change in valuation of derivative liabilities
|
|
|
(535
|
)
|
|
|
660
|
|
|
|
(268
|
)
|
|
|
6,924
|
|
Debt accretion expense and loss on extinguishment
|
|
|
(2,831
|
)
|
|
|
—
|
|
|
|
(2,831
|
)
|
|
|
—
|
|
Income tax (expense)/benefit
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(27
|
)
|
|
|
22
|
|
Income/(loss) from discontinued operations, net of tax
|
|
|
(1
|
)
|
|
|
(397
|
)
|
|
|
230
|
|
|
|
(712
|
)
|
Net loss
|
|
$
|
(7,735
|
)
|
|
$
|
(4,278
|
)
|
|
$
|
(14,849
|
)
|
|
$
|
(6,570
|
)
|
The following is a reconciliation of reportable segments’
assets to the Company’s consolidated total assets. The Other segment includes certain unallocated corporate amounts.
(in thousands)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Total assets – continuing operations:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
6,609
|
|
|
$
|
9,229
|
|
Sunetric
|
|
|
1,637
|
|
|
|
3,041
|
|
Other
|
|
|
10,601
|
|
|
|
1,034
|
|
|
|
$
|
18,847
|
|
|
$
|
13,304
|
|
Total assets – discontinued operations:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3,392
|
|
|
|
3,731
|
|
|
|
$
|
22,239
|
|
|
$
|
17,035
|
|
10. Discontinued Operations
The following is a reconciliation of the major line items constituting
pretax income/(loss) of discontinued operations to the after-tax loss of discontinued operations that are presented in the condensed consolidated statements of operations as indicated:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Major line items constituting pretax income/(loss) of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
59
|
|
|
$
|
117
|
|
|
$
|
405
|
|
|
$
|
1,026
|
|
Cost of goods sold
|
|
|
17
|
|
|
|
343
|
|
|
|
47
|
|
|
|
922
|
|
Selling and operating
|
|
|
37
|
|
|
|
163
|
|
|
|
110
|
|
|
|
613
|
|
General and administrative
|
|
|
6
|
|
|
|
8
|
|
|
|
18
|
|
|
|
116
|
|
Restructuring costs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56
|
|
Pretax income/(loss) of discontinued operations
|
|
|
(1
|
)
|
|
|
(397
|
)
|
|
|
230
|
|
|
|
(712
|
)
|
Income/(loss) on discontinued operations
|
|
$
|
(1
|
)
|
|
$
|
(397
|
)
|
|
$
|
230
|
|
|
$
|
(712
|
)
|
The following is a reconciliation of the carrying amounts of
major classes of assets and liabilities of the discontinued operations to the total assets and liabilities of the discontinued
operations presented separately in the condensed consolidated balance sheets as indicated:
(in thousands)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
Carrying amounts of major classes of assets included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
2,247
|
|
|
$
|
1,560
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
321
|
|
|
|
1,105
|
|
Inventory, net
|
|
|
56
|
|
|
|
112
|
|
Other current assets
|
|
|
51
|
|
|
|
76
|
|
Total major classes of current assets of the discontinued operations
|
|
|
2,675
|
|
|
|
2,853
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
717
|
|
|
|
878
|
|
Total noncurrent assets of discontinued operations
|
|
|
717
|
|
|
|
878
|
|
Total assets of the discontinued operations in the balance sheet
|
|
$
|
3,392
|
|
|
$
|
3,731
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,692
|
|
|
$
|
1,978
|
|
Accrued liabilities
|
|
|
2,237
|
|
|
|
2,394
|
|
Deferred revenue and other current liabilities
|
|
|
113
|
|
|
|
138
|
|
Total current liabilities of discontinued operations
|
|
|
4,042
|
|
|
|
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
|
|
$
|
4,267
|
|
|
$
|
4,735
|
|
11. Subsequent Events
From October 1, 2016 through November 8, 2016, $7.7 million
of the Notes were converted to Class A common stock and cash of $5.8 million held in restricted cash at September 30, 2016 was
released to the Company. The Company has used a portion of the cash received to reduce accounts payable. The Company issued 6.0
million shares in conjunction with the conversion of these Notes.