REAL GOODS SOLAR, INC.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share data)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
9,745
|
|
|
$
|
2,940
|
|
Restricted cash
|
|
|
—
|
|
|
|
173
|
|
Accounts receivable, net
|
|
|
1,990
|
|
|
|
3,002
|
|
Inventory, net
|
|
|
1,185
|
|
|
|
1,502
|
|
Deferred costs on uncompleted contracts
|
|
|
314
|
|
|
|
398
|
|
Other current assets
|
|
|
1,612
|
|
|
|
931
|
|
Current assets of discontinued operations
|
|
|
1,415
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,261
|
|
|
|
9,855
|
|
Property and equipment, net
|
|
|
774
|
|
|
|
620
|
|
Goodwill
|
|
|
1,338
|
|
|
|
1,338
|
|
Net investment in sales-type leases and other assets
|
|
|
1,479
|
|
|
|
1,308
|
|
Noncurrent assets of discontinued operations
|
|
|
605
|
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,457
|
|
|
$
|
14,373
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
—
|
|
|
$
|
663
|
|
Convertible debt, net of deferred cost and pre-installment of $0 and $298
|
|
|
1
|
|
|
|
124
|
|
Accounts payable
|
|
|
547
|
|
|
|
2,019
|
|
Accrued liabilities
|
|
|
1,422
|
|
|
|
1,362
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
—
|
|
|
|
107
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
46
|
|
Deferred revenue and other current liabilities
|
|
|
815
|
|
|
|
1,033
|
|
Current liabilities of discontinued operations
|
|
|
733
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,518
|
|
|
|
6,275
|
|
Other liabilities
|
|
|
2,224
|
|
|
|
2,222
|
|
Derivative liabilities
|
|
|
53
|
|
|
|
137
|
|
Noncurrent liabilities of discontinued operations
|
|
|
758
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,553
|
|
|
|
9,395
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Class A common stock, $.0001 par value, 150,000,000 shares authorized, 7,480,906 and 1,183,151 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
|
|
|
8
|
|
|
|
8
|
|
Additional paid-in capital
|
|
|
204,742
|
|
|
|
187,752
|
|
Accumulated deficit
|
|
|
(190,846
|
)
|
|
|
(182,782
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
13,904
|
|
|
|
4,978
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
20,457
|
|
|
$
|
14,373
|
|
See accompanying notes.
REAL GOODS SOLAR, INC.
Condensed Consolidated Statements of Operations (unaudited)
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
(in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Contract revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale and installation of solar energy systems
|
|
$
|
2,708
|
|
|
$
|
4,750
|
|
|
$
|
6,070
|
|
|
$
|
9,553
|
|
Service
|
|
|
277
|
|
|
|
133
|
|
|
|
568
|
|
|
|
270
|
|
Leasing, net
|
|
|
12
|
|
|
|
14
|
|
|
|
25
|
|
|
|
28
|
|
Contract expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installation of solar energy systems
|
|
|
2,668
|
|
|
|
4,175
|
|
|
|
5,744
|
|
|
|
8,692
|
|
Service
|
|
|
491
|
|
|
|
291
|
|
|
|
809
|
|
|
|
630
|
|
Customer acquisition
|
|
|
1,329
|
|
|
|
618
|
|
|
|
2,251
|
|
|
|
1,416
|
|
Contract income (loss)
|
|
|
(1,491
|
)
|
|
|
(187
|
)
|
|
|
(2,141
|
)
|
|
|
(887
|
)
|
Operating expense
|
|
|
2,461
|
|
|
|
2,743
|
|
|
|
5,432
|
|
|
|
5,759
|
|
Litigation expense
|
|
|
55
|
|
|
|
—
|
|
|
|
135
|
|
|
|
24
|
|
Operating loss
|
|
|
(4,007
|
)
|
|
|
(2,930
|
)
|
|
|
(7,708
|
)
|
|
|
(6,670
|
)
|
Taxes
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
—
|
|
|
|
(27
|
)
|
Derivative and other
|
|
|
10
|
|
|
|
(576
|
)
|
|
|
(368
|
)
|
|
|
(648
|
)
|
Loss from continuing operations, net of tax
|
|
|
(3,997
|
)
|
|
|
(3,533
|
)
|
|
|
(8,076
|
)
|
|
|
(7,345
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
(33
|
)
|
|
|
70
|
|
|
|
12
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,030
|
)
|
|
$
|
(3,463
|
)
|
|
$
|
(8,064
|
)
|
|
$
|
(7,114
|
)
|
Net income (loss) per share – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.53
|
)
|
|
$
|
(165.90
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(349.50
|
)
|
From discontinued operations
|
|
|
0.00
|
|
|
|
3.30
|
|
|
|
0.00
|
|
|
|
11.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.53
|
)
|
|
$
|
(162.60
|
)
|
|
$
|
(1.32
|
)
|
|
$
|
(338.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,481
|
|
|
|
21
|
|
|
|
6,102
|
|
|
|
21
|
|
See accompanying notes.
REAL GOODS SOLAR, INC.
Condensed Consolidated Statement of Changes in Shareholders’
Equity (unaudited)
|
|
Class A Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|
(in thousands, except share data)
|
|
Shares
|
|
|
Amount
|
|
|
Paid - in Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balances, January 1, 2017
|
|
|
1,183,151
|
|
|
$
|
8
|
|
|
$
|
187,752
|
|
|
$
|
(182,782
|
)
|
|
$
|
4,978
|
|
Issuance of common stock and other equity changes related to compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
226
|
|
|
|
—
|
|
|
|
226
|
|
Proceeds from common stock offering, net of costs
|
|
|
6,110,000
|
|
|
|
—
|
|
|
|
16,029
|
|
|
|
—
|
|
|
|
16,029
|
|
Fair value of shares issued for convertible notes and interest
|
|
|
177,018
|
|
|
|
|
|
|
|
735
|
|
|
|
|
|
|
|
735
|
|
Fractional shares issued in connection with reverse split
|
|
|
10,737
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,064
|
)
|
|
|
(8,064
|
)
|
Balances, June 30, 2017
|
|
|
7,480,906
|
|
|
$
|
8
|
|
|
$
|
204,742
|
|
|
$
|
(190,846
|
)
|
|
$
|
13,904
|
|
See accompanying notes.
REAL GOODS SOLAR, INC.
Condensed Consolidated Statements of Cash Flows (unaudited)
|
|
For the Six Months Ended
June 30,
|
|
(in thousands except share data)
|
|
2017
|
|
|
2016
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,064
|
)
|
|
$
|
(7,114
|
)
|
Gain from discontinued operations
|
|
|
12
|
|
|
|
231
|
|
Loss from continuing operations
|
|
|
(8,076
|
)
|
|
|
(7,345
|
)
|
Adjustments to reconcile loss from continuing operations to net cash used in operating activities – continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
201
|
|
|
|
215
|
|
Amortization of debt discount and issuance costs
|
|
|
—
|
|
|
|
623
|
|
Share-based compensation expense
|
|
|
226
|
|
|
|
342
|
|
Change in valuation of derivative liabilities and loss on debt extinguishment
|
|
|
357
|
|
|
|
(267
|
)
|
Loss on sale of assets
|
|
|
13
|
|
|
|
10
|
|
Bad debt expense
|
|
|
23
|
|
|
|
101
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
——
|
|
Accounts receivable
|
|
|
989
|
|
|
|
1,081
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
8
|
|
|
|
571
|
|
Inventory, net
|
|
|
317
|
|
|
|
818
|
|
Deferred costs on uncompleted contracts
|
|
|
84
|
|
|
|
406
|
|
Net investment in sales-type leases and other assets
|
|
|
(169
|
)
|
|
|
(127
|
)
|
Other current assets
|
|
|
(689
|
)
|
|
|
(206
|
)
|
Accounts payable
|
|
|
(1,472
|
)
|
|
|
(445
|
)
|
Accrued liabilities
|
|
|
185
|
|
|
|
(470
|
)
|
Billings in excess of costs on uncompleted contracts
|
|
|
(107
|
)
|
|
|
(662
|
)
|
Deferred revenue and other current liabilities
|
|
|
(218
|
)
|
|
|
19
|
|
Other liabilities
|
|
|
2
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities – continuing operations
|
|
|
(8,326
|
)
|
|
|
(5,328
|
)
|
Net cash (used in) provided by operating activities – discontinued operations
|
|
|
(38
|
)
|
|
|
213
|
|
Net cash used in operating activities
|
|
|
(8,364
|
)
|
|
|
(5,115
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(372
|
)
|
|
|
—
|
|
Proceeds from sale of property and equipment
|
|
|
2
|
|
|
|
9
|
|
Net cash (used in) provided by investing activities
|
|
|
(370
|
)
|
|
|
9
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from warrant exercises, net of costs
|
|
|
—
|
|
|
|
17
|
|
Proceeds from convertible debt, net of costs and restricted cash
|
|
|
—
|
|
|
|
1,533
|
|
Restricted cash released upon conversion of debt
|
|
|
173
|
|
|
|
—
|
|
Proceeds from the issuance of common stock, net of costs
|
|
|
16,029
|
|
|
|
—
|
|
Principal payments on revolving line of credit
|
|
|
(663
|
)
|
|
|
(9,198
|
)
|
Principal borrowings on revolving line of credit
|
|
|
—
|
|
|
|
12,650
|
|
Net cash provided by financing activities
|
|
|
15,539
|
|
|
|
5,002
|
|
Net change in cash
|
|
|
6,805
|
|
|
|
(104
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
2,940
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
9,745
|
|
|
$
|
490
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
8
|
|
|
$
|
94
|
|
Non-cash items
|
|
|
|
|
|
|
|
|
Transfer from accounts payable to other liabilities for amounts paid by insurance carrier
|
|
$
|
—
|
|
|
$
|
1,510
|
|
Transfer of accounts payable to vendor line of credit
|
|
$
|
—
|
|
|
$
|
59
|
|
Change in common stock warrant liability in conjunction with exercise/extinguishment of warrants
|
|
$
|
—
|
|
|
$
|
103
|
|
Payment on line of credit in Class A common stock
|
|
$
|
—
|
|
|
$
|
167
|
|
Discount from warrants issued in conjunction with 2016 Note Offering
|
|
$
|
—
|
|
|
$
|
2,500
|
|
Accrued closing costs on Convertible Note
|
|
$
|
—
|
|
|
$
|
651
|
|
Embedded derivative liability recorded in conjunction with April 2016 Offering
|
|
$
|
—
|
|
|
$
|
2,616
|
|
Convertible notes interest paid with common stock
|
|
$
|
125
|
|
|
$
|
—
|
|
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
1. Organization, Nature of Operations, and Principles of
Consolidation
Real Goods Solar, Inc. (the “Company”
or “RGS”) is a residential and small business commercial solar energy engineering, procurement, and construction firm.
Principles of Consolidation
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 June 30, 2017, the interim results of operations for the three months and six months ended June 30, 2017 and
2016, and cash flows for the six months ended June 30, 2017 and 2016. These interim statements have not been audited. The
balance sheet as of December 31, 2016, 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, 2016.
Discontinued Operations
During 2014, we committed to a plan to sell certain
contracts and rights comprising our large commercial installations business, otherwise known as our former Commercial segment.
At the same time, we determined not to enter into further large commercial installation contracts in the mainland United States.
Most contracts in process at December 31, 2014 were substantially completed during 2015 and remaining work was completed during
2016. We report this business as a discontinued operation, separate from our continuing operations. See Note 10. Discontinued Operations.
Liquidity and Financial Resources Update
The Company experienced recurring operating losses and negative
cash flow from operations in recent years. Starting with the fourth quarter of 2014, measures were implemented to reduce 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)
physically exiting the California market where its costs to operate were high, (iv) focusing on cash sales to customers and not
leasing to customers, (v) negotiating lower costs for equipment, and (vi) operating initiatives designed to improve profitability
such as reducing the length of cycle time for customer installations and lowering the cost of marketing.
The Company’s historical operating losses have required
the Company to raise financial capital. During the fourth quarter of 2016, the Company raised $16.1 million of financial capital,
net of costs, and the Company raised an additional $16.0 million of financial capital, net of costs during the first quarter of
2017. See Note 5, Shareholders’ Equity. The Company used the proceeds from the financial capital raised to reduce accounts
payable, purchase materials to convert its backlog to revenue and begin to execute its revenue growth strategy. The 2017 capital
raises enabled the Company to terminate its line-of-credit facility and an Exclusive Supply Agreement (the “Supply Agreement”)
with a co-terminus term, resulting in a reduction of costs for materials.
The Company estimates that to operate profitably it will require
approximately $16 million in quarterly revenue. Current quarterly revenue is materially less than this amount and, accordingly,
to be successful in increasing sales and resultant revenue, the Company is in the process of implementing a revenue growth strategy
which includes the following components:
|
·
|
Expand the size of the Company’s call center sales organization;
|
|
·
|
Expand the size of the Company’s east coast residential, Sunetric
field sales team, small business commercial sales team, and construction organizations;
|
|
·
|
Expand the digital marketing program, and increase spending to generate
greater customer leads while achieving desired cost of customer acquisition;
|
|
·
|
Make available to the Company’s customers additional third-party
providers to finance customer acquisitions of our solar energy systems
|
|
·
|
Expand the Company’s network of authorized third party installers;
and
|
|
·
|
Invest in innovation for future sales and profitability, such as customer-centric
software, new products and services such as the sale of energy storage and energy audit services to attract new customers.
|
The Company has prepared its business plan for the ensuing
twelve months, and believes it has sufficient financial resources to operate for the ensuing 12-month period. The plan (i)
expects that because accounts payable at June 30, 2017 has been reduced to only $500k, future expenditures will be used for
producing customer installation revenue and no longer having to expend cash to catch-up on previously outstanding accounts
payable (ii) anticipates an increase in contract income from increasing customer installation revenue from implementation of
the revenue growth strategy. Until the Company is successful in implementing its plans to increase revenue to the level
required to break-even, the Company expects to have cash outflow from operating activities. In addition, the Company expects
to have cash outflow from operating activities for the remainder of the year, as cash is utilized to increase revenue by (i)
funding an anticipated level of rooftop installations for customers, (ii) expanding e-sales and field sales organizations and
(iii) increasing marketing spend for lead generation.
2. Significant Accounting Policies
The Company made no changes to its significant accounting policies
during the six months ended June 30, 2017.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency
with the current period presentation. These reclassifications had no effect on the reported results of operations. In the three
months ended June 30, 2017, the Company concluded that it was appropriate to classify items in the statement of operations to conform
with operating metrics reported to investors and the manner in which management evaluates financial performance and to classify
warranty liability separately as current and non-current liabilities. Accordingly, the Company had revised the classification of
certain items to report items in the statement of operations and balance sheet.
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
|
|
|
2016
|
|
|
|
As Filed
|
|
|
Reclassification
|
|
|
Revised
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,555
|
|
|
$
|
(536
|
)
|
|
$
|
2,019
|
|
Accrued liabilities
|
|
$
|
1,284
|
|
|
$
|
78
|
|
|
$
|
1,362
|
|
Current liabilities of discontinued operations
|
|
|
1,457
|
|
|
|
(536
|
)
|
|
|
921
|
|
|
|
$
|
5,296
|
|
|
$
|
(994
|
)
|
|
$
|
4,302
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
1,764
|
|
|
$
|
458
|
|
|
$
|
2,222
|
|
Noncurrent liabilities of discontinued operations
|
|
|
225
|
|
|
|
536
|
|
|
|
761
|
|
|
|
$
|
1,989
|
|
|
$
|
994
|
|
|
$
|
2,983
|
|
These changes in classification did not change the previously
reported operating income (loss) in the statement of operations, or cash generated (used) from operations in the statement of cash
flows, or operating income (loss) for any business segment.
The change in classification of warranty liabilities increased
working capital as follows:
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
|
|
|
2016
|
|
(in thousands)
|
|
As Filed
|
|
|
Reclassification
|
|
|
Revised
|
|
Working Capital
|
|
$
|
2,586
|
|
|
$
|
994
|
|
|
$
|
3,580
|
|
Service Revenue and Expense and Warranties
The Company recognizes service revenue when service work is
completed for customers and third party owners of solar energy systems, and collection of receivables is reasonably assured. Concurrent
with the recognition of revenue the costs of such services are reflected as service expense.
The Company warrants solar energy systems sold to customers
for up to ten years against defects in installation workmanship. The manufacturers’ warranties on the solar energy system
components, which are passed through to the customers, typically have product warranty periods of 10 years and a limited performance
warranty period of up to 25 years. The Company provides for the estimated cost of warranties at the time the related revenue is
recognized. This estimated future costs for the limited warranty is recorded as contract expenses on installation of solar energy
systems. The Company also maintains specific warranty liabilities for large commercial customers included in discontinued operations.
The Company assesses the accrued warranty reserve regularly and adjusts the amounts as necessary based on actual experience and
changes in future estimates. This variance between the previously estimated warranty at the time of installation of the solar energy
system and actual experience rate is recorded as service expense.
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 six months ended June 30, 2017 are not necessarily indicative of the expected
results for the year ending December 31, 2017. 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, 2016. Intercompany balances and transactions have been eliminated.
Recently Issued Accounting Standards
ASU 2017-04
On January 26, 2017, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”),
Intangibles – Goodwill
and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment
, which was issued to simplify the accounting for
goodwill impairment. This ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation.
Impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The standard is effective for financial statements
issued for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed after January 1, 2017, and the Company is assessing the impact of ASU 2017-04 on its consolidated financial statements.
ASU 2016-20
On December 21, 2016, the FASB issued
Accounting Standards Update No. 2016-20 (“ASU 2016-20”),
Technical Corrections and Improvements to Topic 606
,
Revenue from Contracts with Customers
. This ASU provides technical corrections and improvements to Topic 606. This ASU is
effective for the Company on January 1, 2018, which coincides with the effective date of ASU 2014-09 (as defined below). The Company
is assessing the impact of ASU 2016-20 on its consolidated financial statements.
ASU 2016-18
On November 17, 2016, the FASB issued
Accounting Standards Update No. 2016-18 (“ASU 2016-18”),
Statement of Cash Flows: Restricted Cash,
which was
issued to address the diversity that currently exists in the classification and presentation of changes in restricted cash on the
statement of cash flows. This
ASU
requires that a statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts general described as restricted cash and restricted
cash equivalents. 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 2016-18 on its consolidated
statements of cash flows.
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 consolidated statements of cash flows.
ASU 2016-02
On February 25, 2016, the FASB issued Accounting Standards Update
No. 2016-02 (“ASU 2016-02”),
Leases (Topic 842),
which sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also
required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of
their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating
leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing
guidance for sales-type leases, direct financing leases and operating leases. The standard is effective for financial statements
issued for fiscal years beginning after December 15, 2018, and interim periods therein. The Company currently expects that upon
adoption of ASU 2016-02, right-of-use assets and lease liabilities will be recognized on the balance sheet in amounts that will
be material.
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
. This
standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue
model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has
the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer
of risks and rewards, as it is considered in current guidance.
In August 2015, the FASB issued Accounting Standards Update
No. 2015-14,
Revenue from Contracts with Customers – Deferral of the Effective Date
, which defers the effective date
of ASU 2014-09 one year. ASU 2014-09, as deferred by ASU 2015-14, will be effective for the first interim period within annual
reporting periods beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective
method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying
the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative
effect of applying the standard would be recognized at the date of initial application.
During the second quarter of 2017, we began evaluating our contracts
with customers and have determined that for the majority of our contracts, we do not currently anticipate there would be any significant
change to timing or method of recognizing revenue. As such, we do not believe this new standard will have a material impact on
our results of operations, financial condition or cash flows. We are planning to adopt the new standard as of January 1, 2018,
and utilize the modified retrospective method.
3. Line of Credit
On February 9, 2017, the Company terminated its line of credit
with Solar Solutions and Distribution, LLC. Additionally, the Company had a Supply Agreement with Solar Solutions which was
coterminous with the line of credit and accordingly, that was terminated as of the same date. As of June 30, 2017, the Company
does not have a line of credit facility.
4. Commitments and Contingencies
The Company leases office and warehouse space through operating
leases. Some of the leases have renewal clauses, which range from one month to five years.
The Company leases vehicles for certain field personnel through
operating leases. Leases range up to five years with varying termination dates through August 2020.
The following schedule represents the annual future minimum
payments of all leases as of June 30, 2017:
(in thousands)
|
|
Future Minimum
Lease Payments
|
|
2017
|
|
$
|
471
|
|
2018
|
|
|
638
|
|
2019
|
|
|
561
|
|
2020
|
|
|
506
|
|
2021
|
|
|
416
|
|
2022 and thereafter
|
|
|
112
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
2,704
|
|
The Company incurred office and warehouse rent expense of $0.2
and $0.2 million for the three months ended June 30, 2017 and 2016, respectively and $0.3 and $0.4 million for the six months ended
June 30, 2017 and 2016, respectively.
The Company is subject to risks and uncertainties in the normal
course of business, including legal proceedings; governmental regulation, such as the interpretation of tax and labor laws; and
the seasonal nature of its business due to weather-related factors. The Company has accrued for probable and estimable costs incurred
with respect to identified risks and uncertainties based upon the facts and circumstances currently available.
From time to time, the Company may be involved in legal
proceedings that are considered to be in the normal course of business. As previously disclosed in the Company’s
Quarterly Report on Form 10-Q for the first quarter of 2017, on February 16, 2017, Alpha Capital Anstalt, an investor in the
Company’s February 6, 2017 public offering of common stock and warrants, filed a lawsuit against Roth Capital Partners,
LLC, the Company’s investment banking firm in the offering, and the Company in U.S. District Court for the Southern
District of New York. Alpha’s lawsuit alleges that the registration statement for the February 6, 2017 offering
contained material misstatements or omissions and that the Company had breached contractual obligations owed to Alpha. Alpha
seeks unspecified monetary damages, rescission and other unspecified relief in the lawsuit. The Company disputes
Alpha’s allegations and intends to vigorously defend itself in the lawsuit. Under local court rules, the Company
filed a letter motion seeking permission to file a motion to dismiss the claims related to the alleged misstatements and
omissions in the complaint. On May 12, 2017, Alpha Capital filed an amended complaint removing the fraud-related claims and
leaving only breach of contract claims against the Company. The Company does not expect to incur any material charges in
connection with this lawsuit and, as of June 30, 2017, the Company has not recorded a liability associated with this lawsuit.
However, the Company expects its litigation expense to increase in the near future as a result thereof.
On May 1, 2017, Roth Capital Partners, LLC requested indemnification
by the Company for its legal expenses related to this lawsuit under the terms of the Placement Agency Agreement associated with
the February 6, 2017 offering. The Company, under the circumstances, disputes the request for indemnification.
5. Shareholders’ Equity
The following transactions were completed
during the six months ended June 30, 2017:
January 2017 Reverse Stock Split
On January 25, 2017, 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-thirty,
whereby thirty 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 January 23, 2017. 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 for
all periods.
February 2017 Offerings
On February 6, 2017, the
Company closed a $11.5 million offering and sale of (a) units, “February 6 Primary Units,” each consisting of one
share of the Company’s Class A common stock, and a Series K warrant to purchase one share of Class A common stock, and
(b) units, “February 6 Alternative Units,” each consisting of a prepaid Series L warrant to purchase one share
of Common Stock, and a Series K warrant pursuant to the Securities Purchase Agreement, dated as of February 1, 2017, by
and among the Company and several institutional investors, and to public retail investors. As a result, the Company
issued 2,096,920 February 6 Primary Units, 1,613,080 February 6 Alternative Units, 2,096,920 shares of Class A common stock
as part of the February 6 Primary Units, Series K warrants to purchase 3,710,000 shares of Class A common stock, and Series
L warrants to purchase 1,613,080 shares of Class A common stock. The purchase price for a February 6 Primary Unit was $3.10
and the purchase price for a February 6 Alternative Unit was $3.09. The Series K Warrants are currently exercisable at a
price of $3.10 per share, and are exercisable for a period of five years. The Company received net proceeds of approximately
$10.5 million at the closing, after deducting commissions to the placement agents and estimated offering expenses payable by
the Company associated with the offering. As of June 30, 2017, there were 3,710,000 Series K warrants outstanding.
On February 9, 2017, the Company
closed a $6 million offering and sale of (a) units, “February 9 Primary Units,” each consisting of one share of
the Company’s Class A common stock, and a Series M warrant to purchase 75% of one share of Class A common stock, and
(b) units, “February 9 Alternative Units,” each consisting of a prepaid Series N warrant to purchase one share of
Class A common stock, and a Series M warrant, pursuant to the Securities Purchase Agreement, dated as of February 7, 2017, by
and among the Company and several institutional and accredited investors. As a result, the Company issued 1,650,000 February
9 Primary Units, 750,000 February 9 Alternative Units, 1,650,000 shares of Class A common stock as part of the February 9
Primary Units, Series M warrants to purchase 1,800,000 shares of Class A common stock, and Series N warrants to purchase
750,000 shares of Class A common stock. The purchase price for a February 9 Primary Unit was $2.50 and the purchase price for
a February 9 Alternative Unit was $2.49. The Series M Warrants are currently exercisable at a price of $2.40 per share, and
are exercisable for a period of five years. The Company received net proceeds of approximately $5.5 million at the closing,
after deducting commissions to the placement agents and estimated offering expenses payable by the Company associated with
the offering. As of June 30, 2017, there were 1,800,000 Series M warrants outstanding.
Option and Warrant Exercises
During the three and six months ended June 30, 2017 and 2016,
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, 2017 and 2016 the Company issued zero and 69 shares of its Class A common stock pursuant to the exercise of warrants,
respectively.
At June 30, 2017, the Company had the following shares of Class A
common stock reserved for future issuance:
Stock options and grants outstanding under incentive plans
|
|
|
182
|
|
Common stock warrants outstanding - derivative liability
|
|
|
43,016
|
|
Common stock warrants outstanding - equity security
|
|
|
6,484,934
|
|
|
|
|
|
|
Total shares reserved for future issuance
|
|
|
6,528,132
|
|
6. Fair Value Measurements
The following tables summarize the basis used to measure certain
financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:
Balance at June 30, 2017 (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
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
53
|
|
For the Company’s Level 3 measures, which represent common
stock warrants, fair value is based on a Monte Carlo pricing model that is based, in part, upon unobservable inputs for which there
is little or no market data, requiring the Company to develop its own assumptions. The Company used a market approach to valuing
these derivative liabilities.
The following table shows the reconciliation from the beginning
to the ending balance for the Company’s common stock warrant liability and embedded derivative liability measured at fair
value on a recurring basis using significant unobservable inputs (i.e. Level 3) for the period ended June 30, 2017:
(in thousands)
|
|
Common stock
warrant liability
|
|
|
Embedded
derivative
liability
|
|
|
Total
|
|
Fair value of derivative liabilities at December 31, 2016
|
|
$
|
137
|
|
|
$
|
46
|
|
|
$
|
183
|
|
Change in the fair value of derivative liabilities, net
|
|
|
(84
|
)
|
|
|
-
|
|
|
|
(84
|
)
|
Adjustments for conversions of Notes
|
|
|
-
|
|
|
|
(46
|
)
|
|
|
(46
|
)
|
Fair value of derivative liabilities at June 30, 2017
|
|
$
|
53
|
|
|
|
-
|
|
|
$
|
53
|
|
7. Share-Based Compensation
During the six months ended June 30, 2017, under its 2008
Long-Term Incentive Plan, as amended, the Company did not grant any stock options and cancelled zero stock options versus
zero grants of stock options and cancellations of 20 stock options during the six months ended June 30, 2016. 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 $0.05
million and $0.2 million during the three months ended June 30, 2017 and 2016, respectively, and $0.2 million and $0.3 million
during the six months ended June 30, 2017 and 2016, respectively.
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 110,000 for the three months ended June 30, 2017
and 2016, respectively, and 6.5 million and 110,000 for the six months ended June 30, 2017 and 2016, 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 small business commercial
in the continental United States; (2) Sunetric – the installation of solar energy systems for both homeowners and business
owners (commercial) in Hawaii; and (3) Other – corporate operations. The Company discontinued its former large commercial
segment and it is presented as discontinued operations.
Financial information for the Company’s segments and a
reconciliation of the total of the reportable segments’ loss from operations to the Company’s consolidated net loss
are as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Contract revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
2,472
|
|
|
$
|
3,309
|
|
|
$
|
6,119
|
|
|
$
|
7,076
|
|
Sunetric
|
|
|
525
|
|
|
|
1,588
|
|
|
|
544
|
|
|
|
2,775
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consolidated contract revenue
|
|
|
2,997
|
|
|
|
4,897
|
|
|
|
6,663
|
|
|
|
9,851
|
|
Loss from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
(1,706
|
)
|
|
|
(893
|
)
|
|
|
(2,354
|
)
|
|
|
(2,157
|
)
|
Sunetric
|
|
|
(532
|
)
|
|
|
(291
|
)
|
|
|
(1,336
|
)
|
|
|
(1,089
|
)
|
Other
|
|
|
(1,769
|
)
|
|
|
(1,746
|
)
|
|
|
(4,018
|
)
|
|
|
(3,424
|
)
|
Consolidated loss from continuing operations
|
|
|
(4,007
|
)
|
|
|
(2,930
|
)
|
|
|
(7,708
|
)
|
|
|
(6,670
|
)
|
Reconciliation of consolidated loss from operations to consolidated net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative and other
|
|
|
10
|
|
|
|
(576
|
)
|
|
|
(368
|
)
|
|
|
(648
|
)
|
Income tax (expense) benefit
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
—
|
|
|
|
(27
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
(33
|
)
|
|
|
70
|
|
|
|
12
|
|
|
|
231
|
|
Net loss
|
|
$
|
(4,030
|
)
|
|
$
|
(3,463
|
)
|
|
$
|
(8,064
|
)
|
|
$
|
(7,114
|
)
|
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, 2017
|
|
|
December 31, 2016
|
|
Total assets – continuing operations:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
6,317
|
|
|
$
|
7,159
|
|
Sunetric
|
|
|
1,043
|
|
|
|
1,196
|
|
Other
|
|
|
11,077
|
|
|
|
3,857
|
|
|
|
$
|
18,437
|
|
|
$
|
12,212
|
|
Total assets – discontinued operations:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,020
|
|
|
|
2,161
|
|
|
|
$
|
20,457
|
|
|
$
|
14,373
|
|
10. Discontinued Operations
The following is a reconciliation of the major line items constituting
pretax income of discontinued operations to the after-tax gain on 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)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Major line items constituting pretax gain (loss) of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
1
|
|
|
$
|
123
|
|
|
$
|
5
|
|
|
$
|
346
|
|
Contract expense
|
|
|
2
|
|
|
|
17
|
|
|
|
—
|
|
|
|
30
|
|
Operating and other expense
|
|
|
32
|
|
|
|
36
|
|
|
|
(17
|
)
|
|
|
85
|
|
Pretax income (loss) from discontinued operations
|
|
|
(33
|
)
|
|
|
70
|
|
|
|
22
|
|
|
|
231
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(33
|
)
|
|
$
|
70
|
|
|
$
|
12
|
|
|
$
|
231
|
|
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,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of assets included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
584
|
|
|
$
|
536
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
62
|
|
|
|
207
|
|
Inventory, net
|
|
|
37
|
|
|
|
37
|
|
Surety bond deposit
|
|
|
624
|
|
|
|
—
|
|
Other current assets
|
|
|
108
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Total major classes of current assets of the discontinued operations
|
|
|
1,415
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
605
|
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets of discontinued operations
|
|
|
605
|
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
Total assets of the discontinued operations in the balance sheet
|
|
$
|
2,020
|
|
|
$
|
2,161
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
270
|
|
|
$
|
285
|
|
Accrued liabilities
|
|
|
350
|
|
|
|
523
|
|
Deferred revenue and other current liabilities
|
|
|
113
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities of discontinued operations
|
|
|
733
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
758
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
Total major classes of noncurrent liabilities of the discontinued operations
|
|
|
758
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of the discontinued operations in the balance sheet
|
|
$
|
1,491
|
|
|
$
|
1,682
|
|
11. Subsequent Events
The Company has evaluated events up to the filing date of these
interim financial statements and determined that no subsequent event activity required disclosure.
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis provides information
that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should
read this analysis in conjunction with our interim condensed consolidated financial statements and related footnotes. This discussion
and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These
statements involve known and unknown risks, uncertainties and other factors that may cause actual results, level of activity, performance
or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements, including those set forth in our Form 10-K for the year ended December 31, 2016 and
in this Quarterly Report for the period ended June 30, 2017.
Discontinued Operations
During 2014, we committed to a plan to sell certain contracts
and rights comprising our large commercial installations business, otherwise known as our former Commercial segment. At the same
time, we determined not to enter into further large commercial installation contracts in the mainland United States. Most contracts
in process at December 31, 2014 were substantially completed during 2015 and remaining work was completed in 2016. We now
report this business as a discontinued operation, separate from our continuing operations. The following management discussion
and analysis of financial condition and results of operations is for our continuing operations, unless indicated otherwise.
Overview
We are a residential and small business commercial solar energy
engineering, procurement and construction firm. We offer turnkey services, including design, procurement, permitting, build-out,
grid connection, financing referrals and warranty and customer satisfaction activities. Our solar energy systems use high-quality
solar photovoltaic modules. We use proven technologies and techniques to help customers achieve meaningful savings by reducing
their utility costs. In addition, we help customers lower their reliance upon fossil fuel energy sources.
We, including our predecessors, have more than 39 years of experience
in residential solar energy and trace our roots to 1978, when Real Goods Trading Corporation sold the first solar photovoltaic
panels in the United States. We have designed and installed over 25,000 residential and commercial solar energy systems since our
founding.
During 2014, we discontinued our entire former Commercial segment
and sold the assets associated with our catalog business (a portion of the Other segment). As a result of this major strategic
shift, we now operate as three reportable segments: (1) Residential – the installation of solar energy systems for homeowners,
including lease financing thereof, and for small businesses (small business 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. We believe this structure enables us to more effectively manage our operations and resources.
We experienced recurring operating losses and negative cash
flow from operations in recent years. Starting with the fourth quarter of 2014, we implemented measures to reduce 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)
physically exiting the California market where its costs to operate were high, (iv) focusing on cash sales to customers and not
leasing to customers, (v) negotiating lower costs for equipment, and (vi) operating initiatives designed to improve profitability
such as reducing the length of cycle time for customer installations and lowering the cost of marketing.
Our historical operating losses have required us to raise financial
capital. During the fourth quarter of 2016, we raised $16.1 million of financial capital, net of costs, and we raised an additional
$16.0 million of financial capital, net of costs during the first quarter of 2017. We used a portion of the proceeds from the financial
capital raised to reduce accounts payable, purchase materials to convert backlog to revenue and begin to execute our revenue growth
strategy.
Revenue Growth Strategy
We estimate that to operate profitably we will require approximately
$16 million in quarterly revenue. Current quarterly revenue is materially less than this amount and, accordingly, to be successful
in increasing sales and resultant revenue, we are in the process of implementing a revenue growth strategy which includes the following
components:
|
·
|
Expand the size of our call center sales organization;
|
|
·
|
Expand the size of our field sales teams on the east coast and Sunetric,
small business commercial sales team, and construction organizations;
|
|
·
|
Expand the digital marketing program, as well as increase our spending
to generate greater customer leads while achieving desired cost of customer acquisition;
|
|
·
|
Make available to our customers, additional third-party providers
to finance customer acquisitions of our solar energy systems
|
|
·
|
Expand our network of authorized third party installers; and
|
|
·
|
Invest in innovation for future sales and profitability, such as customer-centric
software, new products and services such as the sale of energy storage and energy audit services to attract new customers.
|
We generally recognize revenue from solar energy systems sold
to our customers when we install the solar energy system. Our business requires that we incur costs of acquiring solar panels and
labor to install solar energy systems on our customer rooftops up-front and receive cash from customers thereafter. As a result,
during periods when we are increasing sales, we expect to have negative cash flow from operations.
Explanation of Key Operating Metrics
and Other Items
We regularly review a number of
metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends
affecting our business, formulate financial projections and make strategic decisions. Some of our key operating metrics are
estimates that are based on our management’s beliefs and assumptions and on information currently available to
management. Although we believe that we have a reasonable basis for each of these estimates, we caution you that these
estimates are based on a combination of assumptions that may prove to be inaccurate over time. Any inaccuracies could be
material to our actual results when compared to our calculations. Please see the section titled “Risk Factors” in
Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Item 1A of this
Quarterly Report on Form 10-Q for more information. Furthermore, other companies may calculate these metrics differently than
we do now or in the future, which would reduce their usefulness as a comparative measure.
Statement of Operations
We took the necessary steps to reclassify
our statement of operations this quarter to help our shareholders understand better the business through the eyes of management.
We concluded that it was appropriate to classify items to conform with operating metrics reported to investors and the way management
evaluates financial performance. Definitions of the statement of operations is as follows:
Revenue from installation of solar energy
systems
Revenue includes the contractual sales
price of solar energy systems substantially completed.
Revenue from leasing of solar energy
systems
Revenue includes net amortization of unearned
revenue and projected expenses related to residential customer leases of solar energy systems.
Installation of solar energy systems
expense
The expense of solar energy systems installed
principally includes the costs of materials we purchase from manufacturers of photovoltaic equipment and the cost of personnel directly
involved with the installation of solar energy systems including direct labor of our construction crews and those of third party
integrators. In addition, cost of services includes the estimated cost of our limited warranty, travel costs, and fees we pay third
party financiers providing loans to our customers to finance their solar energy systems.
Service income and expense
Service income includes revenue from service
contracts with customers to provide maintenance on customer owned solar energy systems. In addition, it includes revenue from operating
and maintenance service provided to third-party owners of portfolios of solar energy systems. Service expense includes the labor
and material costs of servicing customers under service contracts and excess warranty expense over estimated warranty costs included
in the expense of solar energy systems sold.
Customer acquisition expense
Customer acquisition expense principally
includes compensation expense, including commissions, of our sales and marketing personal and expenses we incur to receive potential
customer leads from third party providers and digital marketing. Customer acquisition expense is a key metric for us as our goal
is to acquire customers at a cost enabling us to achieve a targeted contribution to recovery of overhead expenses.
Contract income (loss)
Contract income is a key metric for us
because it must be in excess of our operating expenses in order to achieve break-even and better results in future
periods.
Operating expense
Operating expense consists of costs associated
with managing our business segments; Residential, Sunetric and Corporate. These items include administrative costs associated with
sales, general and administrative expenses associated with administrative services such as product development, legal settlements,
legal, information systems (including core technology and telephony infrastructure), and accounting and finance. It also includes
outside professional fees (i.e., legal and accounting services), building expenses and other items associated with general business
administration.
Derivative and other
Derivative and other principally include
changes in fair value of derivative liabilities, loss on debt extinguishment, gain (loss) on sale of fixed assets, amortization
of debt discount, and interest expense.
Other Key Metrics
Backlog
Backlog is discussed below and is an
important metric as we implement our revenue growth strategy.
Key Operational Metric, Gross Margin
on Residential Segment, Our Largest Segment
We utilize a job costing system whereby
employees record their time to projects. We accumulate the cost of idle time reflecting the cost we incur to maintain a construction
organization until our revenue grows, allowing for greater utilization of our construction organization. We anticipate an improvement
in our gross margin percentage in future periods from increased revenue from our implementation of our revenue growth strategy.
|
|
Three Months Ended
June 30, 2016
|
|
|
Six Months Ended
June 30, 2016
|
|
|
Three Months Ended
June 30, 2017
|
|
|
Six Months Ended
June 30, 2017
|
|
Gross margin % on actual installation time
|
|
|
24
|
%
|
|
|
22
|
%
|
|
|
20
|
%
|
|
|
24
|
%
|
Gross margin % including idle time
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
4
|
%
|
|
|
11
|
%
|
Backlog
Backlog represents the dollar amount of revenue that we may
recognize in the future from signed contracts to install solar energy systems that have not yet been installed. The backlog amounts
we disclose are net of cancellations and include anticipated revenues associated with (i) the original contract amounts, and (ii)
change orders for which we have received written confirmations from the applicable customers. Backlog may not be indicative of
future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers. We can provide
no assurance as to the profitability of our contracts reflected in backlog. Backlog is not a measure defined by GAAP, and is not
a measure of contract profitability. Our methodology for determining backlog may not be comparable to methodologies used by other
companies in determining their backlog amounts.
The following table summarizes changes to our backlog by segment
during the six-month period ended June 30, 2017:
(in thousands)
|
|
Residential
|
|
|
Sunetric
|
|
|
Totals
|
|
Backlog of December 31, 2016
|
|
$
|
6,927
|
|
|
$
|
2,448
|
|
|
$
|
9,375
|
|
Bookings from new awards (“Sales”)
|
|
|
2,953
|
|
|
|
82
|
|
|
|
3,035
|
|
Cancellations and reductions on existing contracts
|
|
|
(1,646
|
)
|
|
|
—
|
|
|
|
(1,646
|
)
|
Amounts recognized in revenue upon installation
|
|
|
(3,372
|
)
|
|
|
—
|
|
|
|
(3,372
|
)
|
Backlog at March 31, 2017
|
|
|
4,862
|
|
|
|
2,530
|
|
|
|
7,392
|
|
Bookings from new awards (“Sales”)
|
|
|
6,402
|
|
|
|
1,004
|
|
|
|
7,406
|
|
Cancellations and reductions on existing contracts
|
|
|
(1,870
|
)
|
|
|
(545
|
)
|
|
|
(2,415
|
)
|
Amounts recognized in revenue upon installation
|
|
|
(2,204
|
)
|
|
|
(494
|
)
|
|
|
(2,698
|
)
|
Backlog at June 30, 2017
|
|
$
|
7,190
|
|
|
$
|
2,495
|
|
|
$
|
9,685
|
|
We typically see an increase in the absolute number of cancellations
when sales increase. Nonetheless, our net sales after cancellations more than tripled in the three months ended June 30, 2017 as
compared to the three months ended June 30, 2016. Our small business commercial operations (included in our Residential segment)
demonstrated especially strong growth as we increased the dedicated small commercial sales team. Further, during the second quarter
of 2017, we were awarded two solarize communities in which we will begin selling to homeowners during the third quarter of 2017.
During the second quarter of 2017, we increased our average
monthly headcount of direct sales representatives by almost 50%. With this rapid growth in our sales headcount we are intently
focused on continuing to develop and implement our sales training programs to increase our team’s productivity. We believe
that by supporting our growing sales force with state of the art sales training programs, we will enable them to address typical
customer questions during the sales and installation processes, increasing sales and reducing cancellations.
We compete with larger capitalized firms for customers, employees,
and the services of third party financiers and installers and, accordingly, there can be no assurance that we will be successful
in meeting our goals for increasing sales and revenue.
Backlog is a key metric for us as our goal is to increase our
backlog.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies
or estimates during the six months ended June 30, 2017 from those disclosed in our annual report on Form 10-K for the year ended
December 31, 2016.
Results of Operations
Three Months Ended June 30, 2017 Compared to Three Months
Ended June 30, 2016
Contract revenue:
Sale and installation of solar energy systems
. Sale and
installation of solar energy system revenue decreased $2.0 million, or 43.0%, to $2.7 million during the three months ended June
30, 2017, from $4.8 million during the three months ended June 30, 2016. The decrease is primarily due to a decrease in the number
of installations, with 0.7 MW installed during the three months ended June 30, 2017 compared to 1.1 MW installed during the three
months ended June 30, 2016. Because our backlog had declined so much until we received funding for growth in February 2017, we
have been advising that our installation revenue will lag the sales growth. Because our backlog had declined until we received
funding to effectively pursue our revenue growth strategy in February 2017, we predicted that our installation revenue would lag
the sales growth, as previously disclosed. We experienced such a lag in the second quarter of 2017, and growing sales and our backlog
is a necessary first step to growing installation revenue. It is important to note that as a result of our capital raises of $16
million in February 2017, the second quarter of 2017 is our first full quarter of operating with what we feel is appropriate working
capital in place for effectively pursuing our revenue growth strategy.
Service.
Service revenue increased $0.2 million, or 108.3%,
to $0.3 million during the three months ended June 30, 2017, from $0.1 million during the three months ended June 30, 2016. The
increase is primarily due to a contract entered into with a third party in the fourth quarter of 2016 to provide service work on
their existing customers.
Contract expenses:
Installation of solar energy systems
. Installation of
solar energy system expenses decreased $1.5 million, or 36.1%, to $2.7 million during the three months ended June 30, 2017, from
$4.2 million during the three months ended June 30, 2016, which is attributable to the reduction of installation revenue. Because
we believe that we will enjoy future sales growth, we have continued to maintain our construction crews to meet that anticipated
growth. We anticipate that our cost of idle time will decline and gross margin percentage improve, along with revenue growth.
Service.
Service expense increased $0.2 million,
or 68.7%, to $0.5 million during the three months ended June 30, 2017, from $0.3 million during the three months ended June
30, 2016. The increase is primarily due to the additional costs attributed to a contract entered into with a third party in
the fourth quarter of 2016 to provide service work on their existing customers
Customer acquisition.
Customer acquisition expense increased
$0.7 million during the three months ended June 30, 2017, or 115.0%, to $1.3 million during the three months ended June 30, 2017
from $0.6 million during the three months ended June 30, 2016. This increase is primarily due to increased hiring in our sales
department as well as an increase in marketing spend to obtain higher quality leads and to promote incentive programs in various
states in which we operate. We have been working on what has been emerging as an industry issue – controlling customer acquisition
costs. Our stated target has been to move more toward digital marketing. These leads are not only more cost effective but we have
seen that they also close sales at a higher rate. This is part of our continued focus on moving away from time old tradition of
costly paid leads, electing for partnering with lead providers that only get paid when we sign a contract, not just leads.
Operating expense
. Operating expenses decreased $0.2
million, or 10.3%, to $2.5 million during the three months ended June 30, 2017, compared to $2.7 million during the three months
ended June 30, 2016.
Litigation expense.
Litigation expenses during the three
months ended June 30, 2017 was $55,000 compared to $0 during the three months ended June 30, 2016. Our legal expenses may increase
in subsequent periods. See Note 4, Commitments and Contingencies.
Derivative and other
. Derivative and other income (loss)
during the three months ended June 30, 2017 was $0.01 million compared to a loss of $0.6 million during the three months ended
June 30, 2016. The reduction in loss during the three months ended June 30, 2017 was related to the reduction in debt and the conversion
of financial derivative instruments.
Six Months Ended June 30, 2017 Compared to Six Months
Ended June 30, 2016
Contract revenue:
Sale and installation of solar energy systems
. Sale and
installation of solar energy system revenue decreased $3.5 million, or 36.5%, to $6.1 million during the six months ended June
30, 2017, from $9.6 million during the six months ended June 30, 2016. The decrease is primarily due to a decrease in the number
of installations, with 1.6 MW installed during the six months ended June 30, 2017 compared to 2.3 MW installed during the six months
ended June 30, 2016. Because our backlog had declined so much until we received funding for growth in February 2017, we have been
advising that our installation revenue will lag the sales growth. That occurred in the second quarter of 2017, and growing sales
and our backlog is a necessary first step. It is important to note that given our capital raises of $16 million in February this
is our first full quarter of operating with what we feel is appropriate working capital in place for growth.
Service.
Service revenue increased $0.3 million,
or 110.4%, to $0.6 million during the six months ended June 30, 2017 from $0.3 million during the six months ended June 30,
2016. The increase is primarily due to a contract entered into with a third party in the fourth quarter of 2016 to provide
service work on their existing customers.
Contract expenses:
Installation of solar energy systems
. Installation of
solar energy system expenses decreased $2.9 million, or 33.9%, to $5.7 million during the six months ended June 30, 2017, from
$8.7 million during the six months ended June 30, 2016, which corresponds to the reduction of installation revenue during this
same time comparison.
Service.
Service expense increased slightly to
$0.8 million during the six months ended June 30, 2017, from $0.6 million during the six months ended June 30, 2016. The
increase is primarily due to the additional costs attributed to a contract entered into with a third party in the fourth
quarter of 2016 to provide service work on their existing customers.
Customer acquisition.
Customer acquisition expense increased
$0.8 million during the six months ended June 30, 2017, or 59.0%, to $2.3 million during the six months ended June 30, 2017 from
$1.4 million during the six months ended June 30, 2016. This increase is primarily due to increased hiring in our sales department
as well as an increase in marketing spend to obtain higher quality leads and to promote incentive programs in various states in
which we operate.
Operating expense.
Operating expenses decreased $0.3
million, or 5.7%, to $5.4 million during the six months ended June 30, 2017 compared to $5.8 million during the six months ended
June 30, 2016.
Litigation expense.
Litigation expenses during the six
months ended June 30, 2017 was $135,000 compared to $24,000 during the six months ended June 30, 2016. Our legal expenses may
increase in subsequent periods. See Note 4, Commitments and Contingencies.
Derivative and other
. Derivative and other (loss)
during the six months ended June 30, 2017 was a loss of $0.4 million compared to a loss of $0.6 million during the six months
ended June 30, 2016. The reduction in loss during the six months ended June 30, 2017 was related to the reduction in debt and
conversion of financial derivative instruments. The loss on conversion results from the trading price of the Company’s
Class A common stock being higher when converted than the effective conversion price per share to the debt holder.
Seasonality
Our quarterly net revenue and operating results for solar energy
system installations are difficult to predict and have, in the past, and may, in the future, fluctuate from quarter to quarter
as a result of changes in state, federal, or private utility company subsidies, as well as weather, economic trends and other factors.
We have historically experienced seasonality in our solar installation business, with the first quarter representing our lowest
installation quarter of the year primarily due to adverse weather. We have historically experienced seasonality in our sales of
solar energy systems, with the fourth and first quarters of the year being less sales orders than the second and third quarters.
Liquidity and Capital Resources
We
experienced recurring operating losses and negative cash flow from operations in recent years. Starting with the fourth quarter
of 2014, we implemented measures to reduce our 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) physically exiting the California market where its costs to operate were
high, (iv) focusing on cash sales to customers and not leasing to customers, (v) negotiating lower costs for equipment, and (vi)
operating initiatives designed to improve profitability such as reducing the length of cycle time for customer installations and
lowering the cost of marketing. We repaid in full and terminated our line-of-credit facility during the first quarter of 2017 as
our working capital was sufficient for current operations. See Note 3, Line of Credit. We believe there are sufficient financial
resources to operate for the ensuing 12 months
.
The historical operating losses have required us to raise financial
capital. During the fourth quarter of 2016, we raised $16.1 million of financial capital, net of costs and an additional $16.0
million of financial capital, net of costs during the first quarter of 2017. See Note 5, Shareholders’ Equity. We used the
proceeds from the financial capital raised to reduce accounts payable, purchase materials to convert backlog to revenue and begin
to execute our revenue growth strategy. The 2017 capital raises enabled us to terminate our line-of-credit facility and a Supply
Agreement which had a coterminous term, resulting in a reduction of costs for materials.
Until we are successful in implementing our revenue growth strategy,
we expect to have cash outflow from operating activities. In addition, we expect that we will have cash outflow from operating
activities for the remainder of the year as we will utilize cash to increase revenue by (i) funding an anticipated level of rooftop
installations for customers, (ii) expanding our e-sales and field sales organizations and (iii) increasing our marketing spend
for lead generation.
The following table shows the number
of outstanding warrants, the associated exercise prices. We do not control when the investors exercise their warrants, and, accordingly,
there can be no assurance that the investors will exercise any warrants or whether we would receive any cash from the exercise
of these warrants.
|
|
Number of
|
|
Exercise Price
|
|
Warrants
|
|
$ 1.270
|
|
|
616,731
|
|
$ 1.360
|
|
|
8,302
|
|
$ 2.400
|
|
|
1,800,000
|
|
$ 3.100
|
|
|
3,710,000
|
|
$ 3.125
|
|
|
120,000
|
|
$ 3.875
|
|
|
185,500
|
|
$ 8.250
|
|
|
30,834
|
|
Greater than $45.000
|
|
|
56,590
|
|
Total
|
|
|
6,527,957
|
|
Warrant holders have the option of cashless exercise
Cash Flows
The following table summarizes our primary sources (uses) of
cash during the periods presented:
|
|
For the Six
Months Ended June 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities – continuing operations
|
|
$
|
(8,326
|
)
|
|
$
|
(5,328
|
)
|
Operating activities – discontinued operations
|
|
|
(38
|
)
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(8,364
|
)
|
|
|
(5,115
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(370
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
15,539
|
|
|
|
5,002
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
6,805
|
|
|
$
|
(104
|
)
|
Continuing Operations
Operating activities
. Cash outflow from operations for
the six-month period ended June 30, 2017 increased $3.2 million as compared to the six-month period ended June 30, 2016. This increase
was primarily due to (i) an increase in vendor payments on prior obligations, (ii) an increase in customer acquisition expenses
of $0.9 million to begin the revenue growth strategy, (iii) an increase in prepayments of $0.5 million and (iv) a reduction in
gross margin of $0.4 million arising from the reduction in revenue. Our net cash used in operating activities during the six months
ended June 30, 2016 was due to our net loss decreased by noncash items of $1.0 million and a net decrease in working capital assets
and liabilities of $1.0 million.
Investing activities
. During the six months ended June
30, 2017, we received proceeds of $2,000 for the sale of equipment, and purchased equipment of $372,000. During the six months
ended June 30, 2016, we received proceeds of $9,000 for the sale of equipment.
Financing activities.
Our financing activities provided
net cash of $15.5 million and $5.0 million during the six months ended June 30, 2017 and 2016, respectively. Our net cash provided
by financing activities during the six months ended June 30, 2017 reflected the net proceeds $0.2 million from the 2016 Note Offering,
net proceeds of $16.0 million from the issuance of common stock during the February 2017 offerings, offset by repayment of our
line-of-credit facility of $0.7 million. Our net cash provided by financing activities during the six months ended June 30, 2016
reflected the net proceeds received from the 2016 Note Offering of $1.5 million and additional borrowings on our line of credit
of $3.5 million.
Discontinued Operations
Operating activities
. Our operating activities used net
cash of $38,000 and provided $0.2 million during the six months ended June 30, 2017 and 2016, respectively. The cash used by discontinued
operations during the six months ended June 30, 2017 was primarily due to legal fees as compared to the six months ended June 30,
2016 where cash provided was attributable to the continued wind-down of remaining commercial projects.
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships
with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, established
for the purpose of facilitating off-balance sheet arrangements or other limited purposes and as a result we do not have and are
not reasonably likely to have future off-balance sheet arrangements.
Risk Factors
We caution that there are risks and uncertainties that could
cause our actual results to be materially different from those indicated by forward-looking statements that, from time-to-time,
we make in filings with the U.S. Securities and Exchange Commission, news releases, reports, proxy statements, registration statements
and other written communications as well as oral forward-looking statements made by our representatives. These risks and uncertainties
include, but are not limited to, those risks set forth in Part II, Item 1A of this and other quarterly reports and listed in the
section entitled “RISK FACTORS” in our Annual Report on Form 10-K for the year ended December 31, 2016 which
is on file with the U.S. Securities and Exchange Commission. Except for the historical information contained herein, the matters
discussed in this analysis are forward-looking statements that involve risk and uncertainties, including, but not limited to, general
economic and business conditions, competition, pricing, brand reputation, consumer trends, and other factors which are often beyond
our control.
The risks and uncertainties we have described are not the only
ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may
also affect our business operations. We do not undertake any obligation to update forward-looking statements except as required
by law.