|
Item 7.
|
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 audited consolidated financial statements and related footnotes. This discussion and
analysis contain 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 this Form 10-K.
Overview
For the last 40 years, we have been a residential and small
business commercial solar EPC company. 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.
As of September 29, 2017, we are the exclusive domestic and
international licensee of the POWERHOUSE™ in-roof solar shingle, an innovative and aesthetically pleasing solar shingle system
developed by Dow. During 2018, we received UL certification for POWERHOUSE™ 3.0 and manufactured our initial solar shingles
during December 2018. We anticipate that in the future, the majority of our revenue will arise from sales of POWERHOUSE™
in-roof solar shingles to local roofing companies, solar installers and homebuilders.
We, including our predecessors, have more than 40 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 26,000 residential and commercial solar energy systems since our
founding.
We operate as three reportable segments: (1) Solar Division – the installation of solar energy
systems for homeowners, including lease financing thereof, and small business commercial in the United States; (2) POWERHOUSE™
- the manufacturing and sales of solar shingles; and (3) Other – corporate operations.
On
March 27, 2019, our Board of Directors determined to exit its mainland residential solar business to focus on the POWERHOUSE™
in-roof shingle market and reduce overall cash outflow, with the goal of maximizing future shareholder value. We believe this structure
and realignment enables us to effectively manage our operations and resources.
As an EPC, 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.
As manufacturer of POWERHOUSE™, we will recognize revenue
upon shipment of materials related to customer purchase order fulfillment. During 2018, we established a supply chain to manufacture
POWERHOUSE™. We also began building a nationwide network of local roofers and solar installers. We received our first purchase
order from a customer on December 27, 2018 and shipped to the customer in January 2019.
POWERHOUSE™ License
A material significant event occurred on September 29, 2017
(the “Effective Date”), when we executed the License with Dow, providing us an exclusive domestic and international
right to commercialize the POWERHOUSE™ in-roof solar shingle, an innovative and aesthetically pleasing solar shingle system
developed by Dow. The POWERHOUSE™ 1.0 and 2.0 versions used CIGS (copper indium gallium selenide solar cells) technology
which had a high manufacturing cost, resulting in the product not being consumer price friendly. Conversely, the POWERHOUSE™
3.0 version was developed with traditional silicon solar cells to increase solar production and to provide a competitive consumer
price point.
In addition to the License, we executed a Trademark License
Agreement (the “TLA”), a Technology Service Agreement (the “TSA”) and a Sales Agreement-Surplus Property
(the “Sales Agreement”) with Dow. The execution of the TLA allows us to market the POWERHOUSE™ 3.0 product using
the Dow name.
Under the terms of the License, we will produce, market and
sell POWERHOUSE™ 3.0, for which we paid a license fee of $3 million along with a royalty fee equal to 2.5% against net sales
of the POWERHOUSE™ product and services, payable quarterly in arrears. Further, we were responsible for all costs to obtain
UL certification and we are responsible for the prosecution of all related patents world-wide, which may be offset against the
payment of the royalty fee. During December 2018, we began commercialization of POWERHOUSE™ 3.0 entailing the manufacturing,
marketing and sale of POWERHOUSE™ 3.0 to roofing companies.
As of December 31, 2018, we have invested approximately $3.2
million that has been capitalized to the POWERHOUSE™ License, an intangible asset on the Consolidated Balance Sheet.
Other Key Metrics
Backlog
Backlog is discussed below and an important
metric as we implement our revenue growth strategy.
Key Operational Metric, Gross Margin
on Mainland Residential Operations, Currently Our Largest EPC Operating Unit
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. Cost of goods sold (“COGS”)
include direct project installation costs (materials, labor, travel, financing fees, and estimated warranty costs) and indirect
costs for project installation support (including un-utilized labor of idle time of construction crews, supplies, and insurance).
We employ an internal time reporting system to determine COGS and resulting gross margin percentage which is used by the Company
to measure its performance in achieving gross margin percentage targets. Further, we measure COGS per watt based upon COGS, excluding
idle time, divided by the aggregate watts of systems installed during the period. For financial reporting purposes, COGS include
the idle time of construction crews currently maintained by the Company in anticipation of future growth of backlog. Gross margin
percentage on actual installation time is not a measure defined by generally accepted accounting principles.
Our gross margin percentage on actual installations
and with idle time decreased year over year in part due to a greater mix of small commercial projects in 2018 as compared to 2017,
as these projects typically have lower margins than our residential installations. Additionally, a majority of indirect labor costs
are fixed, which lowers the gross margin % with idle time when there is a decline in revenue as we experienced in 2018 vs. 2017.
|
|
Twelve Months Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Gross margin percentage on actual installation time
|
|
|
21
|
%
|
|
|
24
|
%
|
Gross margin percentage including idle time
|
|
|
6
|
%
|
|
|
13
|
%
|
Backlog
Backlog represents the dollar amount of revenue that may be
recognized in the future from signed contracts to install solar energy systems that have not yet been installed without taking
into account possible future cancellations. Backlog is not a measure defined by generally accepted accounting principles and is
not a measure of contract profitability. Our methodology for determining backlog may not be comparable to methodologies used by
other companies in determining their backlog amounts. The backlog amounts we disclose are net of cancellations received and include
anticipated revenues associated with (i) the original contract amounts, and (ii) change orders for which we have received written
confirmations from customers. Backlog may not be indicative of future operating results, and projects in our backlog may be cancelled,
modified or otherwise altered by customers.
The following table summarizes changes to our backlog for our Solar Division for the years ended December
31, 2018 and December 31, 2017:
(in thousands)
|
|
Solar Division
|
|
Backlog at January 1, 2017
|
|
$
|
9,375
|
|
Bookings from new awards (“Sales”)
|
|
|
26,596
|
|
Cancellations and reductions on existing contracts
|
|
|
(9,206
|
)
|
Amounts recognized in revenue upon installation
|
|
|
(14,000
|
)
|
Backlog at December 31, 2017
|
|
|
12,765
|
|
Bookings from new awards (“Sales”)
|
|
|
26,744
|
|
Cancellations and reductions on existing contracts
|
|
|
(12,835
|
)
|
Amounts recognized in revenue upon installation
|
|
|
(11,017
|
)
|
Backlog at December 31, 2018
|
|
$
|
15,657
|
|
We have experienced a high level of contract cancellations,
which we attribute to (i) the competitive nature of the solar industry wherein customers shop price after signing a contract and
exercise their right to cancel during a three day rescission period after we countersign their contract, (ii) customer home’s
physical condition requires upgrades that they may not be able to afford or reduces their return on investment, and (iii) delays
to installing their system within their desired timeframe which are often a result of prolonged periods of time to receive local
utility approval for installations. We determined that for optimum internal operations, and customer satisfaction, that a backlog
equivalent to a few months of sales is optimal.
Revenue Growth Strategy
Our plans to increase revenue include:
|
·
|
Manufacture, market and sell the POWERHOUSE™ 3.0 to roofing companies, solar installers and home builders;
|
|
·
|
Leverage the POWERHOUSE™ brand to generate leads and revenue for the Solar Division;
|
|
·
|
Leverage our investment in RGS 365™ customer-centric software for the POWERHOUSE™ and Solar Divisions;
|
|
·
|
Expand our digital marketing program to generate customer leads while achieving our desired cost of acquisition;
|
|
·
|
Make available to our customers, additional third-party providers to finance customer acquisitions of our solar energy systems;
|
|
·
|
Expand our EPC operations to new states; and
|
|
·
|
Expand our network of authorized third-party installers.
|
Recent Developments
As of previously reported on Form 8-K filed February 8, 2019,
we received a written notification from The Nasdaq Stock Market (“Nasdaq”) on February 6, 2019, that our Class A common
stock would be suspended from trading on the Nasdaq Capital Market effective as of the open of business on February 15, 2019 as
a result of failing to regain compliance with the $1.00 per share minimum bid price requirement for continued inclusion on Nasdaq
based on Listing Rule 5550(a)(2). As a result, we moved trading of our Class A common stock to the OTCQX® as of the open of
trading on February 15, 2019.
On March 27, 2019, our Board of Directors determined to exit
our mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow,
with the goal of maximizing future shareholder value. We believe this structure and realignment enables us to effectively manage
our operations and resources. This realignment is expected to result in the reduction of workforce payroll plus burden of
approximately $4.0 million annually. Revenues and net loss in 2018 for the mainland residential solar business were approximately
$8.9 million and $6.3 million, respectively. In order for us to convert our existing backlog to revenue, we plan to use authorized
integrators to complete installations throughout the remainder of 2019.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results
of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting
principles, or “GAAP.” The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. We have identified the following to be critical accounting
policies whose application have a material impact on our reported results of operations, and which involve a higher degree of complexity,
as they require us to make judgments and estimates about matters that are inherently uncertain.
Revenue Recognition
Effective January 1, 2018, we have adopted “Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606 –
Revenue from
Contracts with Customers
related to revenue recognition. Under the standard, revenue is recognized 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 using a five-step model to achieve that principle. In addition, the standard requires disclosures
to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We have
elected to adopt the modified retrospective method for transitioning this accounting standard which requires that the cumulative
effect of applying the revenue standard to existing contracts be recorded as an adjustment to retained earnings. Based on our review
of contracts that were not substantially completed on December 31, 2017, there was no impact to the opening retained earnings balance.
Deferred Revenue
When we receive consideration, or such consideration
is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract,
we record deferred revenue, which represents a contract liability. We recognize deferred revenue as net sales after we have satisfied
our performance obligations to the customer and all revenue recognition criteria are met.
Revenue Recognition – Installation of photovoltaic
modules (“PV”) solar systems
We use standard contract templates to initiate sales
with customers and determined that each project started during the year ended December 31, 2018 contains one performance obligation.
Although the contract states multiple services which are capable of being distinct, they are considered a single integrated output
to the customer which is customized for each customer. As such all the services promised within a contract are considered one performance
obligation. We recognize revenue for installation of PV solar systems over time following the transfer of control to the customer
which typically occurs as the PV solar system is being installed. If control transfers over time, revenue is recognized based on
the extent of progress towards the completion of the performance obligation. The method utilized by us to measure the progress
towards completion requires judgment and is based on the products and services provided. We utilize the input method to measure
the progress of our contracts because it best depicts the transfer of assets to the customer which incurs as materials are consumed
by the project. The input method measures the progress towards completion based on the ratio of costs incurred to date (“actual
cost”) to the total estimated costs (“budget”) at completion of performance obligation. Revenue, including estimated
fees, are recorded proportionally as costs are incurred. Costs to fulfill include materials, labor and/or subcontractors’
costs, and other direct costs. Indirect costs and costs to procure the panels, inverters, and other system miscellaneous costs
needed to satisfy the performance obligation are excluded since the customer does not gain control of those items until delivered
to the site. Including the costs of those items would overstate the extent of our performance.
Each project’s transaction price is included within the contract and although there is only one
performance obligation, changes to the contract price could take place after fulfillment of the performance obligation. We have
considered financing components on projects started during the year ended December 31, 2018 and elected the use of a practical
expedient where an entity need not adjust the promised amount of consideration for the effects of a significant financing component
if the entity expects, at contract inception, that the period between when the entity transfers a promised service to the customer
and when the customer pays for that good or service will be one year or less. All receivables from projects are expected to be
received within one year from project completion and there were no adjustments to the contract values.
Under ASC 606, we are required to recognize as an
asset the incremental costs of obtaining a contract with a customer if those costs are expected to be recovered. We incur sales
commissions that otherwise would not have been incurred if the contract had not been obtained. These costs are recoverable; however,
we have elected the use of a practical expedient to expense these costs as incurred as the amortization period of the asset would
be less than one year.
Revenue Recognition – Operations & Maintenance
We generally recognize revenue for standard, recurring
commercial operations and maintenance services over time as customers receive and consume the benefits of such services, which
typically include corrective maintenance, data hosting or energy/deck monitoring services for a period. These services are treated
as stand-ready performance obligations and are satisfied evenly over the length of the agreement, so we have elected a time-based
method to measure progress and recorded revenue using a straight-line method.
Revenue Recognition – Service & Warranty
Warranties for workmanship and roof penetration are
included within each contract. These warranties cannot be purchased separately from the related services, are intended to safeguard
the customer against workmanship defects and does not provide any incremental service to the customer. It is necessary for us to
perform the specified tasks to provide assurance that the final product complies with agreed-upon specifications and likely do
not give rise to a separate performance obligation. We will continue to account for any related warranties in accordance with ASC
460-10 and record an accrual for potential warranty costs at the completion of a project. Any services provided to a customer outside
of warranties such as system inspections are recognized upon completion of the service.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We estimate anticipated losses based on the expected collectability
of all of our accounts receivable, which takes into account collection history, the number of days past due, identification of
specific customer exposure and current economic trends. When we determine a balance is uncollectible and no longer actively pursue
collection of the account, it is written off.
Inventory
Inventory for our Solar Division segments consists primarily
of solar energy system components (such as photovoltaic modules and inverters) located at our warehouses and is stated at the lower
of cost (first-in, first-out method) or net realizable value. We identify the inventory items to be written down for obsolescence
based on the item’s current sales status and condition. We write down discontinued or slow-moving inventories based on an
estimate of the markdown to retail price needed to sell through our current stock level of the inventories on a quarterly basis.
POWERHOUSE™ inventories are recorded at the lower of cost (incurred from third party supply channel
manufacturers) or net realizable value. Cost is determined using the first-in, first-out method. Management will establish an estimated
excess and obsolete inventory reserve based on slow-moving and obsolete inventory. At December 31, 2018, there was no excess and
obsolete inventory reserve.
Warranties
Currently, our standard manufacturing warranty for our POWERHOUSE™
solar shingle comes with a 11-year product warranty, which is the standard product warranty of most traditional solar panels today,
and a 24-year power production warranty. We receive warranties from our supply chain matching the terms of the POWERHOUSE™
solar shingle warranty.
We warrant our EPC 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 typically passed through to the customers, typically have product warranty periods of 10 years and a limited performance
warranty period of 25 years. We generally provide for the estimated cost of warranties at the time the related revenue is recognized.
We also maintain specific warranty liabilities for large commercial customers. We assess the accrued warranty reserve regularly
and adjust the amounts as necessary based on actual experience and changes in future estimates.
Goodwill and Purchased Intangibles
We review goodwill for impairment annually during the second
quarter, or more frequently if a triggering event occurs between impairment testing dates. As a result of the annual impairment
test, we fully impaired the goodwill balance charging an impairment loss to the consolidated statement of operations during the
second quarter of 2018.
Up-front POWERHOUSE™ 3.0 license payments when incurred,
costs to obtain UL certification and legal costs to acquire the License are initially capitalized and thereafter amortized to operations,
commencing November 2018 after UL certification, on a straight-line basis over the expected life of the License through 2034.
Common Stock Warrants
We account for common stock warrants in accordance with applicable
accounting guidance provided in 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 our 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, event of default or failure to deliver shares. We classify these warrant liabilities on the Consolidated
Balance Sheet as current or long-term liabilities based on their expiration date. They are revalued at each balance sheet date
after their initial issuance with changes in the value recorded in earnings. The Company used a Monte Carlo pricing model to value
these warrant 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 assumptions used on April 9, 2018, June 30,
2018, September 30, 2018 and December 31, 2018 to value the common stock warrant liabilities are as follows:
|
|
Exercise
Price
|
|
|
Strike
Floor
|
|
|
Closing
Market Price
(average)
|
|
|
Risk-free
Rate
|
|
|
Dividend
Yield
|
|
|
Market
Price
Volatility
|
|
|
Remaining
Term
(years)
|
|
Warrant Liability April 09, 2018
|
|
$
|
1.12
|
|
|
$
|
0.97
|
|
|
$
|
0.85
|
|
|
|
2.60
|
%
|
|
|
0.00
|
%
|
|
|
120
|
%
|
|
|
5.00
|
|
Warrant Liability June 30, 2018
|
|
$
|
0.55
|
|
|
$
|
0.19
|
|
|
$
|
0.57
|
|
|
|
2.72
|
%
|
|
|
0.00
|
%
|
|
|
115
|
%
|
|
|
4.78
|
|
Warrant Liability September 30, 2018
|
|
$
|
0.32
|
|
|
$
|
0.19
|
|
|
$
|
0.39
|
|
|
|
2.93
|
%
|
|
|
0.00
|
%
|
|
|
115
|
%
|
|
|
4.53
|
|
Warrant Liability December 31, 2018
|
|
$
|
0.32
|
|
|
|
N/a
|
|
|
$
|
0.52
|
|
|
|
2.49
|
%
|
|
|
0.00
|
%
|
|
|
120
|
%
|
|
|
4.28
|
|
The Company also holds common stock warrants which
have been classified in equity. Upon conversion of the warrants, the Company determines the fair value of the warrants exercised
using the share price and records the impact to common stock and additional paid-in capital.
Derivatives
The 2018 Notes contained conversion features which have been
accounted for in accordance with FASB ASC 815,
Derivatives and Hedging.
The conversion options were embedded within the
2018 Notes but have been separated as (i) their economic characteristics and risks did not clearly and closely relate to the 2018
Notes (ii) the 2018 Notes were not remeasured at fair value and (iii) a separate instrument with the same terms as the conversion
options would be considered a derivative. The 2018 Notes also contained various redemption clauses (contingent) that met all the
criteria of a derivative and were measured and recorded at fair value at the date of issuance and were revalued at each balance
sheet date with changes in the value recorded in earnings.
We used a Lattice pricing model to value these derivative
liabilities. The Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little or no market
data, requires us to develop its own assumptions. We classified these derivative liabilities on the Consolidated Balance Sheet
as short-term liabilities since they had maturities of one year. When the conversion option was exercised, for accounting purposes
both liabilities (i.e., the debt host and the separated derivative liability) were subject to extinguishment accounting. As such,
a gain or loss upon extinguishment of the two liabilities equal to the difference between the recorded value of the liabilities
and the fair value of the consideration issued to extinguish them was recorded. The assumptions used on April 9, 2018, June
30, 2018, September 30, 2018 and December 31, 2018 to value the derivative liabilities are as follows:
|
|
Conversion
Price
|
|
|
Closing
Market Price
(average)
|
|
|
Risk-free
Rate
|
|
|
Dividend
Yield
|
|
|
Market
Price
Volatility
|
|
|
Remaining
Term (years)
|
|
|
Debt
Yield
|
|
|
Soft
Call
Threshold
|
|
|
First
Redemption
Period
|
|
|
Second
Redemption
Period
|
|
Derivative Liability April 09, 2018
|
|
$
|
1.26
|
|
|
$
|
0.85
|
|
|
|
2.08
|
%
|
|
|
0.00
|
%
|
|
|
110
|
%
|
|
|
1.00
|
|
|
|
60
|
%
|
|
$
|
2.52
|
|
|
|
20
|
%
|
|
|
25
|
%
|
Derivative Liability June 30, 2018
|
|
$
|
0.55
|
|
|
$
|
0.57
|
|
|
|
2.23
|
%
|
|
|
0.00
|
%
|
|
|
130
|
%
|
|
|
0.78
|
|
|
|
60
|
%
|
|
$
|
2.52
|
|
|
|
20
|
%
|
|
|
25
|
%
|
Derivative Liability September 30, 2018
|
|
$
|
0.31
|
|
|
$
|
0.39
|
|
|
|
2.36
|
%
|
|
|
0.00
|
%
|
|
|
125
|
%
|
|
|
0.53
|
|
|
|
60
|
%
|
|
$
|
2.52
|
|
|
|
20
|
%
|
|
|
25
|
%
|
Derivative Liability December 31, 2018
|
|
$
|
0.31
|
|
|
$
|
0.52
|
|
|
|
2.45
|
%
|
|
|
0.00
|
%
|
|
|
90
|
%
|
|
|
0.28
|
|
|
|
60
|
%
|
|
$
|
2.52
|
|
|
|
20
|
%
|
|
|
25
|
%
|
Share-Based Compensation
We recognize compensation expense for share-based awards based on the estimated fair value of the award
on the date of grant. We measure compensation cost at the grant date fair value of the award and recognize compensation expense
based on the probable attainment of a specified performance condition for performance-based awards or over a service period for
time-based awards. We use the Black-Scholes option valuation model to estimate the fair value for purposes of accounting and disclosures.
In estimating this fair value, certain assumptions are used (see Note 11. Share-Based Compensation in Item 8 of this Annual
Report), including the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The
use of different estimates for any one of these assumptions could have a material impact on the amount of reported compensation
expense. Expected volatilities were based on a value calculated using the historical stock price volatility. Expected life was
based on the specific vesting terms of the option and anticipated changes to market value and expected employee exercise behavior.
The risk-free interest rate used in the option valuation model was based on U.S. Treasury zero-coupon securities with remaining
terms similar to the expected term on the options. RGS does not anticipate paying any cash dividends on its Class A common
stock in the foreseeable future and, therefore, an expected dividend yield of zero was used in the option valuation model. The
assumptions used to value to 2018 Options as of December 31, 2018 are as follows:
2018 Non-Qualified Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Vesting
Period
|
|
Expected
Life
|
|
Expected
Dividend
Rate
|
|
|
Risk-free
Rate
|
|
|
Market
Price
Volatility
|
|
June 21, 2018
|
|
2.78 years
|
|
4.2 years
|
|
|
0
|
%
|
|
|
2.70
|
%
|
|
|
148.77
|
%
|
September 4, 2018
|
|
2.82 years
|
|
5.7 years
|
|
|
0
|
%
|
|
|
2.78
|
%
|
|
|
147.40
|
%
|
September 10, 2018
|
|
2.81 years
|
|
5.7 years
|
|
|
0
|
%
|
|
|
2.83
|
%
|
|
|
146.66
|
%
|
October 15, 2018
|
|
2.96 years
|
|
4.3 years
|
|
|
0
|
%
|
|
|
2.96
|
%
|
|
|
149.82
|
%
|
October 29, 2018
|
|
2.92 years
|
|
4.3 years
|
|
|
0
|
%
|
|
|
2.87
|
%
|
|
|
150.34
|
%
|
Income Taxes
We recognize income taxes under the asset and liability method.
Deferred income taxes are recognized based on temporary differences between financial reporting and income tax bases of assets
and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions
in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment
is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating
loss carry-forward prior to its expiration, is more likely than not. A valuation allowance is established if it is more likely
than not that a deferred tax asset will not be realized. In determining the appropriate valuation allowance, we consider
projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies, and
our overall deferred tax position.
Results of Operations
Year Ended December 31, 2018 Compared to Year Ended
December 31, 2017
POWERHOUSE™ Segment:
We received our first purchase order from a customer on December 27, 2018 and shipped to the customer
in January 2019. Accordingly, we have no revenue during 2018 from POWERHOUSE™ and a backlog of one transaction. We commenced
amortization of the POWERHOUSE™ license upon receiving UL approval on November 2, 2018 and have recorded two months of amortization
expense of $0.03 million.
Solar Division Segments:
Contract revenue:
Sale and installation of solar energy systems
.
Sale and installation of solar energy system revenue decreased $2.5 million, or 17.9%, to $11.5 million during the twelve months
ended December 31, 2018, from $14.0 million during the twelve months ended December 31, 2017. During the twelve months ended December
31, 2018, installations decreased 0.5 megawatts to 2.8 as compared to the 3.3 megawatts installed during the twelve months ended
December 31, 2017. This decrease was primarily due to slower sales in the beginning of the year and a decline in our weighted
average selling price per watt of 2.6%. Additionally, limitations including cutbacks of major incentive programs in Massachusetts
and Rhode Island caused delays in the installation of our backlog in the fourth quarter of 2018 as approvals required for installation
were not available. This delayed the installation of many projects in the fourth quarter, as Massachusetts and Rhode Island comprised
a significant portion of our backlog in 2018. As previously disclosed, we are exiting our mainland residential solar business.
Contract expenses:
Installation of solar energy systems
.
Installation of solar energy system expenses decreased $1.9 million, or 14.5%, to $11.2 million during the twelve months ended
December 31, 2018, from $13.1 million during the twelve months ended December 31, 2017, which corresponds to the reduction of
installation revenue during this same time comparison. We utilize gross margin percentage to measure performance utilizing an
internal time reporting system allowing us to measure both total incurred contract expense and contract expense excluding construction
crew idle time. For the twelve months ended December 31, 2018, our residential segments gross margin without idle time declined
due to a 2.6% decline in the average selling price per watt exceeding the 0.8% decline in the costs of installation per watt.
Customer acquisition.
Customer acquisition
expense decreased $2.3 million during the twelve months ended December 31, 2018, or 38.9%, to $3.6 million from $5.9 million during
the twelve months ended December 31, 2017. This decrease is primarily attributable to a reduction in workforce related to a targeted
focus on increasing individual sales team member key performance indicators (“KPIs”) and a more selective hiring process
allowed for significant improvements in lead performance. Our continued efforts to refine our digital lead development also played
a large role in the decrease.
Operating expense:
Operating expenses decreased
$1.0 million, or 9.2%, to $9.8 million during the twelve months ended December 31, 2018 compared to $10.8 million during the twelve
months ended December 31, 2017, primarily due to a decrease in labor and legal fees.
Other Segment:
Goodwill impairment.
Goodwill impairment increased
by $1.3 million during the year ended December 31, 2018 due to the results of our annual impairment testing. We concluded that
the fair value of the goodwill no longer exceeded its carrying value and wrote off the goodwill balance.
Litigation and proxy contest expense.
Litigation and
proxy contest expenses during the twelve months ended December 31, 2018 was $0.2 million compared to $1.5 million during the twelve
months ended December 31, 2017. The decrease of $1.3 million is primarily attributable to nonrecurring proxy contest expenses of
$1.2 million in 2017. Our legal expenses may increase in subsequent periods. See Note 7. Commitments and Contingencies.
Change in fair value of derivative liabilities, loss on
debt extinguishment and amortization of debt discount & deferred loan costs
.
The
issuance of the 2018 Notes, subsequent conversions and revaluation of the derivative liabilities resulted in our recording derivative
liabilities as disclosed in Note 9. Convertible Debt. Additionally, interest expense increased due to the accretion of the debt
discount and deferred loan costs related to the 2018 Notes. No such transaction occurred during the year ended December 31, 2017.
Other (income) expenses.
Other expenses primarily represent
a gain on settlement of a long-term liability with a directors and officers liability insurance provider.
Liquidity and Capital Resources
Our historical operating results indicate substantial doubt
exists related to our ability to continue as a going concern. Management’s plans and actions, which are intended to mitigate
the substantial doubt raised by our historical operating results in order to satisfy our estimated liquidity needs for a period
of 12 months from the issuance of the consolidated financial statements, are discussed below. As we cannot predict, with certainty,
the outcome of our actions to generate liquidity, or whether such actions would generate the expected liquidity as currently planned,
management’s plans to mitigate the risk and extend cash resources through the evaluation period, are not considered probable
under current accounting standards for assessing an entity’s ability to continue as a going concern.
As of December 31, 2018, we have cash of $5.8 million, working
capital of $6.9 million, debt of $0.5 million and shareholders’ equity of $10.8 million.
We have experienced recurring operating losses and negative
cash flow from operations which have necessitated:
|
·
|
Exiting the mainland residential division and execution of a reduction in workforce, see Note 16. Subsequent
Events;
|
|
·
|
Focusing on growing POWERHOUSE™ revenue through a re-allocation of personnel to POWERHOUSE™ sales and initiating
sales to other solar installers and distribution companies; and
|
|
·
|
Raising additional capital. See Note 8. Shareholders Equity and Note 16. Subsequent Events for transactions
to raise capital during the second quarter of 2019.
|
No assurances can be given that we will be successful with our
plans to grow revenue for profitable operations.
We have historically incurred a cash outflow from our operations
as our revenue has not been at a level for profitable operations. As discussed above, a key component of our revenue growth strategy
is the sale of our POWERHOUSE™ 3.0 in-roof solar shingle. We obtained UL certification for POWERHOUSE™ at the close
of 2018 and therefore only recently begun to market POWERHOUSE™ at the start of 2019. We believe that we will require several
quarters for us to generate sales to meet our goals for profitable operations.
The first quarter of the year has always been one of our slowest
sales periods and as such, this is a period of higher cash outflow. POWERHOUSE™ 3.0 sales during the first quarter of 2019
have been materially less than our expectations and, accordingly, we raised additional capital during the second quarter of 2019.
Additionally, we have arranged with a third-party specialty
lender to provide financing to our POWERHOUSE™ roofers for their purchases of POWERHOUSE™ in-roof shingles. Under this
agreement, we are to be paid the next day after the roofers place a purchase order and, accordingly, when roofers avail themselves
of this financing, we do not have accounts receivable, enhancing our cash flow from operations.
As discussed above, (i) we expect that future sales of POWERHOUSE™
3.0 in-roof solar shingles will be our primary source of revenue and (ii) we only recently began marketing POWERHOUSE™ 3.0,
and accordingly, we expect to incur a quarterly cash outflow for a portion of 2019. We have placed purchase orders with our supply
chain partners for inventory to be converted to revenue.
The Company has prepared its business plan for the ensuing twelve months, which includes the following:
|
·
|
Exit from the mainland residential division which historically has generated material cash outflows;
|
|
·
|
Generate POWERHOUSE™ revenue through sales to local roofing companies, home builders and EPC companies;
|
|
·
|
Convert current mainland residential backlog into revenue through authorized third-party integrators; and
|
|
·
|
Increase sales and installations with commercial customers on the mainland and sales and installations of residential and commercial
systems in Hawaii.
|
Cash Flows
The following table summarizes our primary sources (uses) of
cash during the periods presented:
|
|
2018
|
|
|
2017
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(12,367
|
)
|
|
|
(16,035
|
)
|
Investing activities
|
|
|
(2,146
|
)
|
|
|
(1,959
|
)
|
Financing activities
|
|
|
19,174
|
|
|
|
16,224
|
|
Net increase (decrease) in cash
|
|
$
|
4,661
|
|
|
$
|
(1,770
|
)
|
Operating activities
. Cash outflow from operations for
the twelve-month period ended December 31, 2018 decreased $3.7 million as compared to the twelve-month period ended December 31,
2017. This decrease in cash used in operations was primarily due to a reduction of $2.3 million in our customer acquisition costs
and a reduction in payroll costs corresponding to a reduction in personnel. Additionally, we collected on receivables from certain
previously installed commercial projects and settled on litigation related to a large commercial project which released funds previously
held in escrow.
Investing activities
. During the year ended December
31, 2018, cash outflows for investing activities increased $0.2 million as compared to the twelve-months ended December 31, 2017.
We made payments to the Dow Chemical Company attributable to the License of $2.0 million in 2018 and $1.0 million in 2017. Additionally,
in 2017 we had approximately $0.8 million in capital expenditures.
Financing activities
.
Cash
inflow from financing activities increased $3.0 million to $19.2 million in 2018 from $16.2 million in 2017. The increase is due
to capital raising activities in 2018 providing net cash inflows of $19.2 million consisting of (i) $9.9 million related to the
2018 Notes (ii) $8.7 million related to exercise of warrants and (iii) $1.8 million related to the January 2018 Offering less
payments for transaction costs of $1.2 million, as compared to cash inflows of $17.5 million related to the February 2017 offerings
discussed in Note 8. Shareholders’ Equity. Additionally, in 2017 we paid $1.0 million to close our revolving line of credit.
Off-Balance Sheet Arrangements
We have not participated 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.
|
Item 8.
|
Financial Statements.
|
Report of Independent Registered
Public Accounting Firm
Shareholders and Board of Directors
Real Goods Solar, Inc.
Denver, Colorado
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated
balance sheet of Real Goods Solar, Inc. (the “Company”) and subsidiaries as of December 31, 2018, the related consolidated
statements of operations, shareholders’ equity, and cash flows for the year ended December 31, 2018, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018, and the
results of their operations and their cash flows for the year ended December 31, 2018, in conformity with accounting principles
generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has suffered recurring losses and negative cash flows from operations and has an accumulated
deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to
these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor
since 2018.
Dallas, Texas
April 15, 2019
Report of Independent Registered
Public Accounting Firm
To the Shareholders and the Board of Directors of
Real Goods Solar, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet
of Real Goods Solar, Inc. (the “Company”) as of December 31, 2017, the related consolidated statements of operations,
shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the Company as of December 31, 2017, and the consolidated results of its operations and
its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements,
the Company has suffered recurring losses from operations and has an accumulated deficit as of December 31, 2017 that raise substantial
doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements
based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to
obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audit provides a reasonable basis for our opinion.
/s/ Moss Adams LLP
Denver, Colorado
April 2, 2018, except for the reclassification adjustments applied
to the 2017 financial statements as described under the heading
Discontinued Operations
in Note 2 as to which the date is
April 15, 2019.
We have served as the Company’s auditor from 2017 to 2018.
REAL GOODS SOLAR, INC.
Consolidated Balance Sheets
|
|
As of December 31,
|
|
(in thousands, except share and per share data)
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,831
|
|
|
$
|
1,170
|
|
Accounts receivable, net
|
|
|
1,340
|
|
|
|
2,787
|
|
Costs in excess of billings
|
|
|
11
|
|
|
|
62
|
|
Inventory, net
|
|
|
1,595
|
|
|
|
2,013
|
|
Deferred costs on uncompleted contracts
|
|
|
236
|
|
|
|
615
|
|
Other current assets
|
|
|
1,613
|
|
|
|
1,987
|
|
Total current assets
|
|
|
10,626
|
|
|
|
8,634
|
|
Property and equipment, net
|
|
|
778
|
|
|
|
1,154
|
|
POWERHOUSE™ license, net
|
|
|
3,202
|
|
|
|
1,114
|
|
Goodwill
|
|
|
-
|
|
|
|
1,338
|
|
Net investment in sales-type leases and other assets
|
|
|
1,654
|
|
|
|
2,018
|
|
Total assets
|
|
$
|
16,260
|
|
|
$
|
14,258
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Convertible debt, net
|
|
|
336
|
|
|
|
1
|
|
Accounts payable
|
|
|
862
|
|
|
|
1,657
|
|
Accrued liabilities
|
|
|
1,571
|
|
|
|
1,474
|
|
Deferred revenue and other current liabilities
|
|
|
956
|
|
|
|
1,810
|
|
Total current liabilities
|
|
|
3,725
|
|
|
|
4,942
|
|
Other liabilities
|
|
|
1,242
|
|
|
|
3,074
|
|
Common stock warrant liabilities
|
|
|
511
|
|
|
|
76
|
|
Total liabilities
|
|
|
5,478
|
|
|
|
8,092
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Class A common stock, par value $.0001 per share; 150,000,000 shares authorized;
91,859,638 and 8,151,845 shares issued and outstanding at December 31, 2018 and 2017, respectively
|
|
|
17
|
|
|
|
8
|
|
Class B common stock, par value $.0001 per share; 50,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
253,331
|
|
|
|
206,640
|
|
Accumulated deficit
|
|
|
(242,566
|
)
|
|
|
(200,482
|
)
|
Total shareholders’ equity
|
|
|
10,782
|
|
|
|
6,166
|
|
Total liabilities and shareholders’ equity
|
|
$
|
16,260
|
|
|
$
|
14,258
|
|
See accompanying notes to consolidated financial
statements.
REAL GOODS SOLAR, INC.
Consolidated Statements of Operations
|
|
For the years ended December 31,
|
|
(in thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
Contract revenue:
|
|
|
|
|
|
|
|
|
Sale and installation of solar energy systems
|
|
$
|
11,511
|
|
|
$
|
14,030
|
|
Service
|
|
|
1,159
|
|
|
|
1,509
|
|
Leasing, net
|
|
|
59
|
|
|
|
53
|
|
Contract expenses:
|
|
|
|
|
|
|
|
|
Installation of solar energy systems
|
|
|
11,177
|
|
|
|
13,135
|
|
Service
|
|
|
1,589
|
|
|
|
1,623
|
|
Customer acquisition
|
|
|
3,616
|
|
|
|
5,918
|
|
Contract loss
|
|
|
(3,653
|
)
|
|
|
(5,084
|
)
|
Operating expense
|
|
|
9,793
|
|
|
|
10,789
|
|
Proxy contest expense
|
|
|
-
|
|
|
|
1,186
|
|
Goodwill impairment
|
|
|
1,338
|
|
|
|
-
|
|
Litigation
|
|
|
187
|
|
|
|
327
|
|
Operating loss
|
|
|
(14,971
|
)
|
|
|
(17,386
|
)
|
Change in fair value of derivative liabilities and loss on debt extinguishment
|
|
|
(27,134
|
)
|
|
|
(379
|
)
|
Amortization of debt discount and deferred loan costs
|
|
|
(1,042
|
)
|
|
|
(3
|
)
|
Other income
|
|
|
1,063
|
|
|
|
68
|
|
Net loss
|
|
$
|
(42,084
|
)
|
|
$
|
(17,700
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(1.18
|
)
|
|
$
|
(2.55
|
)
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
35,618
|
|
|
|
6,950
|
|
See accompanying notes to consolidated financial
statements.
REAL GOODS SOLAR, INC.
Consolidated Statement of Changes in Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Class A Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
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
|
|
Equity changes related to compensation
|
|
|
|
|
|
|
-
|
|
|
|
249
|
|
|
|
-
|
|
|
|
249
|
|
Proceeds from common stock offering and warrant exercises, net of costs
|
|
|
6,780,939
|
|
|
|
-
|
|
|
|
17,095
|
|
|
|
-
|
|
|
|
17,095
|
|
Fair value of shares issued for convertible note and interest and preferred stock liability converted to common stock
|
|
|
177,018
|
|
|
|
-
|
|
|
|
734
|
|
|
|
-
|
|
|
|
734
|
|
Fractional shares issued in connection with reverse split
|
|
|
10,737
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Proxy contest consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
810
|
|
|
|
-
|
|
|
|
810
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,700
|
)
|
|
|
(17,700
|
)
|
Balances, December 31, 2017
|
|
|
8,151,845
|
|
|
$
|
8
|
|
|
$
|
206,640
|
|
|
$
|
(200,482
|
)
|
|
$
|
6,166
|
|
Proceeds from January 2018 Offering of common stock issuance and warrant exercises, net of costs
|
|
|
1,600,000
|
|
|
|
-
|
|
|
|
1,524
|
|
|
|
-
|
|
|
|
1,524
|
|
Issuance and conversion of 2018 Notes, net of costs
|
|
|
72,826,126
|
|
|
|
8
|
|
|
|
31,816
|
|
|
|
-
|
|
|
|
31,824
|
|
Proceeds from warrant exercises related to 2018 Note Offering
|
|
|
8,681,667
|
|
|
|
1
|
|
|
|
13,088
|
|
|
|
-
|
|
|
|
13,089
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
263
|
|
|
|
-
|
|
|
|
263
|
|
Common stock issued to settle proxy contest
|
|
|
600,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(42,084
|
)
|
|
|
(42,084
|
)
|
Balances, December 31, 2018
|
|
|
91,859,638
|
|
|
$
|
17
|
|
|
$
|
253,331
|
|
|
$
|
(242,566
|
)
|
|
$
|
10,782
|
|
See accompanying notes to consolidated financial
statements.
REAL GOODS SOLAR, INC.
Consolidated Statements of Cash Flows
|
|
For the years ended December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$(42,084)
|
|
|
$(17,700)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
401
|
|
|
|
415
|
|
Amortization of POWERHOUSE™ License
|
|
|
33
|
|
|
|
-
|
|
Share-based compensation expense
|
|
|
263
|
|
|
|
249
|
|
Goodwill impairment
|
|
|
1,338
|
|
|
|
-
|
|
Change in fair value of derivative liabilities and loss on debt extinguishment
|
|
|
27,134
|
|
|
|
379
|
|
Amortization of debt discount and issuance costs
|
|
|
1,042
|
|
|
|
-
|
|
Bad debt expense
|
|
|
37
|
|
|
|
353
|
|
Inventory obsolescence
|
|
|
32
|
|
|
|
398
|
|
Gain on settlement of liability
|
|
|
(942
|
)
|
|
|
-
|
|
(Gain) loss on sale of assets
|
|
|
-
|
|
|
|
(3
|
)
|
Loss on settlement of proxy contest
|
|
|
-
|
|
|
|
810
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,410
|
|
|
|
397
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
51
|
|
|
|
164
|
|
Inventory
|
|
|
386
|
|
|
|
(872
|
)
|
Deferred costs on uncompleted contracts
|
|
|
379
|
|
|
|
(217
|
)
|
Net investment in sales-type leases and other current assets
|
|
|
277
|
|
|
|
(945
|
)
|
Other non-current assets
|
|
|
364
|
|
|
|
542
|
|
Accounts payable
|
|
|
(834
|
)
|
|
|
(804
|
)
|
Accrued liabilities
|
|
|
97
|
|
|
|
(844
|
)
|
Billings in excess of costs on uncompleted contracts
|
|
|
-
|
|
|
|
(107
|
)
|
Deferred revenue and other current liabilities
|
|
|
(854
|
)
|
|
|
664
|
|
Other liabilities
|
|
|
(897
|
)
|
|
|
1,086
|
|
Net cash used in operating activities
|
|
|
(12,367
|
)
|
|
|
(16,035
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Payments related to POWERHOUSE™ license
|
|
|
(2,121
|
)
|
|
|
(1,114
|
)
|
Purchases of property and equipment
|
|
|
(25
|
)
|
|
|
(432
|
)
|
Payments related to RGS 365™ portal
|
|
|
-
|
|
|
|
(413
|
)
|
Net cash used in investing activities
|
|
|
(2,146
|
)
|
|
|
(1,959
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from warrants
|
|
|
9,614
|
|
|
|
1,064
|
|
Proceeds from issuance of 2018 Notes
|
|
|
5,000
|
|
|
|
-
|
|
Proceeds from collection of Investor Notes
|
|
|
4,891
|
|
|
|
-
|
|
Proceeds from the issuance of common stock
|
|
|
920
|
|
|
|
16,187
|
|
Payments for transaction costs
|
|
|
(1,251
|
)
|
|
|
(158
|
)
|
Restricted cash released upon conversion of debt
|
|
|
-
|
|
|
|
173
|
|
Principal borrowings on revolving line of credit
|
|
|
-
|
|
|
|
1,498
|
|
Principal payments on revolving line of credit
|
|
|
-
|
|
|
|
(2,540
|
)
|
Net cash provided by financing activities
|
|
|
19,174
|
|
|
|
16,224
|
|
Net increase (decrease) in cash
|
|
|
4,661
|
|
|
|
(1,770
|
)
|
Cash at beginning of year
|
|
|
1,170
|
|
|
|
2,940
|
|
Cash at end of year
|
|
$
|
5,831
|
|
|
$
|
1,170
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
Interest paid
|
|
|
-
|
|
|
|
8
|
|
Non-cash items
|
|
|
|
|
|
|
|
|
Proxy contest settlement payment in shares of common stock
|
|
|
-
|
|
|
|
810
|
|
Debt discount arising from 2018 Note Offering
|
|
|
10,088
|
|
|
|
-
|
|
Embedded derivative liability with 2018 Note Offering
|
|
|
12,987
|
|
|
|
-
|
|
Common stock warrant liability with 2018 Note Offering
|
|
|
6,818
|
|
|
|
-
|
|
Issuance of Class A common stock for conversion of 2018 Notes, net of costs
|
|
|
31,824
|
|
|
|
-
|
|
Issuance of Class A common stock for exercise of common stock warrants
|
|
|
13,089
|
|
|
|
-
|
|
Interest paid with common stock
|
|
|
-
|
|
|
|
125
|
|
See accompanying notes to consolidated
financial statements.
Notes to consolidated financial statements
1. Principles of Consolidation, Organization and Nature of
Operations
Real Goods Solar, Inc. (“RGS” or the “Company”)
is in the solar energy systems business as (i) the manufacturer of POWERHOUSE™ 3.0 in-roof solar shingles under a license
agreement with Dow Global Technologies LLC (“Dow”) and (ii) a residential and commercial solar energy engineering,
procurement, and construction firm (“EPC”).
The consolidated financial statements include the accounts of
RGS and its wholly-owned subsidiaries. RGS has prepared the accompanying consolidated financial statements in accordance with accounting
principles generally accepted in the United States, or GAAP, which include the Company’s accounts and those of its subsidiaries.
Intercompany transactions and balances have been eliminated. The Company has included the results of operations of acquired companies
from the effective date of acquisition.
POWERHOUSE™ License Agreement
A material significant event occurred on September 29, 2017
(the “Effective Date”), when the Company executed an exclusive domestic and international world-wide Technology License
Agreement (the “License”) with Dow for its POWERHOUSE™ in-roof solar shingle. The License allows RGS to market
the POWERHOUSE™ 3.0 product using the Dow name, and under the terms of the License agreed to a license fee of $3 million.
The license fee was comprised of two payments; the first $1 million was paid in connection with the Effective Date of the License
in 2017 and the remaining $2 million was paid in 2018 in connection with receiving UL certification. The License requires the Company
to commercialize and sell a minimum of 50 megawatts of solar within 5-years of the Effective Date to retain exclusive world-wide
rights.
The Company obtained UL certification for POWERHOUSE™
3.0 during November 2018, immediately after which the Company commenced commercialization of POWERHOUSE™ 3.0 entailing the
manufacturing, marketing and sale of POWERHOUSE™ 3.0 to roofing companies and homebuilders. The first purchase order for
POWERHOUSE™ 3.0 was received from a customer on December 27, 2018 and shipped to the customer in January 2019.
Liquidity and Financial Resources Update
The Company’s historical operating results indicate substantial
doubt exists related to its ability to continue as a going concern. Management’s plans and actions, which are intended to
mitigate the substantial doubt raised by the Company’s historical operating results in order to satisfy its estimated liquidity
needs for a period of 12 months from the issuance of the consolidated financial statements, are discussed below. As the Company
cannot predict, with certainty, the outcome of its actions to generate liquidity, or whether such actions would generate the expected
liquidity as currently planned, management’s plans to mitigate the risk and extend cash resources through the evaluation
period, are not considered probable under current accounting standards for assessing an entity’s ability to continue as a
going concern.
As of December 31, 2018, the Company has cash of $5.8 million, working capital of $6.9 million, debt of
$0.5 million and shareholders’ equity of $10.8 million.
The Company has experienced recurring operating losses and negative
cash flow from operations which have necessitated:
|
·
|
Exiting the mainland residential division and execution of a reduction in workforce, see Note 16. Subsequent
Events;
|
|
·
|
Focusing on growing POWERHOUSE™ revenue through a re-allocation of personnel to POWERHOUSE™ sales and initiating
sales to other solar installers and distribution companies; and
|
|
·
|
Raising additional capital. See Note 8. Shareholders Equity and Note 16. Subsequent Events for transactions
to raise capital during the second quarter of 2019.
|
No assurances can be given that the Company will be successful
with its plans to grow revenue for profitable operations.
The Company has historically incurred a cash outflow from its
operations as its revenue has not been at a level for profitable operations. As discussed above, a key component of the Company’s
revenue growth strategy is the sale of the POWERHOUSE™ 3.0 in-roof solar shingle. The Company obtained UL certification for
POWERHOUSE™ at the close of 2018 and therefore only recently begun to market POWERHOUSE™ at the start of 2019. The
Company believes that it will require several quarters to generate sales to meet its goals for profitable operations.
The first quarter of the year has always been one of the Company’s
slowest sales periods and as such, this is a period of higher cash outflow. POWERHOUSE™ 3.0 sales during the first quarter
of 2019 have been materially less than the Company’s expectations and, accordingly, the Company raised additional capital
during the second quarter of 2019.
As discussed above, (i) the Company expects that future sales
of POWERHOUSE™ 3.0 in-roof solar shingles will be its primary source of revenue and (ii) the Company only recently began
marketing POWERHOUSE™ 3.0, and accordingly, expects to incur a quarterly cash outflow for a portion of 2019.
Errors Identified in Previously Issued Consolidated Financial
Statements
During the preparation of the 2018 consolidated financial statements, the Company identified an error
in the accounting for the 2018 Note Offering (Note 9. Convertible Debt). The Company incorrectly included debt issue costs of $0.6
million in the calculation of the debt discount and loss upon issuance, which resulted in amortization of debt discount being overstated
and the loss on debt extinguishment to be understated. As a result, “change in fair value of derivative liabilities and loss
on debt extinguishment” was understated by $0.5 million and $0.7 million and “amortization of debt discount and deferred
loan costs” was overstated by $0.8 million and $0.7 million for the quarters ended June 30, 2018, and September 30, 2018,
respectively. The Company evaluated the impact of the error on its previously issued financial statements and concluded that the
impact was not material. The error was corrected in the fourth quarter of 2018 and resulted in a net impact of $0.09 million.
2. Significant Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in
accordance with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the 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.
Significant estimates are used to value warranty liabilities, the fair value of derivative liabilities embedded in complex financial
instruments, common stock warrants, and allowance for doubtful accounts. Actual results could differ materially from those estimates.
Discontinued Operations
During 2014, the Company committed to a plan to sell certain
contracts and rights comprised of the Company’s large commercial installations business, otherwise known as the Company’s
former Commercial segment. The Company had previously reported this business as a discontinued operation, separate from the Company’s
continuing operations. As of December 31, 2018, this business no longer met the criteria to be presented as discontinued operations.
The remaining assets and liabilities were reclassified out of discontinued operations to continuing operations on the consolidated
balance sheet as of December 31, 2017. Income from discontinued operations on the consolidated statements of operations was reclassified
into the loss related to current continuing operations for the years ended December 31, 2018 and 2017 and had no impact on net
loss. References to any gains or losses from discontinued operations as well as net cash used or provided by discontinued operations
were removed, with these amounts reclassified into the continuing operations figures for the years ending December 31, 2018 and
2017. The 2017 financial statements have been reclassified to eliminate the presentation of the business as a discontinued operation
and did not result in a material change.
Cash
The Company considers all highly liquid instruments with an
original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of demand deposit accounts
with financial institutions that are denominated in U.S. dollars
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments. The Company estimates anticipated losses based
on the expected collectability of all accounts receivable, taking into account collection history, number of days past due, identification
of specific customer exposure and current economic trends. When the Company determines a balance is uncollectible and no longer
actively pursues collection of the account, it is written off. The allowance for doubtful accounts was $0.5 million and $0.8 million
December 31, 2018 and 2017, respectively.
Inventory
Inventory for our Solar Division consists primarily of solar
energy system components (such as solar panels and inverters) and its cost is determined by the first-in, first-out ("FIFO")
method. The inventory is stated at the lower of cost or net realizable value with an allowance for slow moving and obsolete inventory
items based on an estimate of the markdown to the retail price required to sell or dispose of such items. The Company has an allowance
for obsolete or slow-moving inventory of $0.7 and $0.6 million at December 31, 2018 and 2017, respectively.
POWERHOUSE™ inventories are recorded at lower of cost (incurred from third party supply channel
manufacturers) or net realizable value. Cost is determined using the FIFO method. Management will establish an estimated excess
and obsolete inventory reserve based on slow-moving and obsolete inventory. At December 31, 2018, there was no excess and obsolete
inventory reserve.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation of property and equipment is computed on the straight-line method over estimated useful lives, generally
three to twenty years. RGS amortizes leasehold and building improvements over the shorter of the estimated useful lives of the
assets or the remaining term of the lease or remaining life of the building, respectively.
Goodwill and Purchased Intangibles
Intangible assets arising from business combinations, such as
acquired customer contracts and relationships (collectively, “customer relationships”), licenses, trademarks, non-compete
agreements are initially recorded at fair value. Goodwill represents the excess of the purchase price over the fair value of the
net identifiable assets acquired in a business combination.
The Company early adopted ASU 2017-04 during the second quarter of 2018 while performing its annual impairment
test. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the
overall financial performance of the reporting units against the planned results used in the last quantitative goodwill impairment
test. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit
is less than its carrying value, then a quantitative impairment test is performed. The estimated fair value of the reporting unit
is compared with its carrying value (including goodwill) and if the carrying value exceeds estimated fair value, an impairment
charge is recorded. As a result of the annual impairment test, the Company fully impaired the Goodwill balance charging an impairment
loss to the Consolidated Statement of Operations.
Fair value of the reporting unit is determined using a discounted
cash flow analysis. The use of present value techniques requires us to make estimates and judgments about the Company’s future
cash flows. These cash flow forecasts will be based on assumptions that are consistent with the plans and estimates the Company
uses to manage its business. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant
judgment at many points during the analysis. Application of alternative assumptions and definitions could yield significantly different
results.
The Company capitalized the up-front POWERHOUSE™ 3.0 license
payment, costs to obtain UL certification and legal costs to acquire the License. The intangible asset is amortized to operations,
commencing November 2018 after UL certification, on a straight-line basis over the expected life of the License through 2034. As
of December 31, 2018, the intangible asset had a carrying cost of $3.2 million, with $0.03 million in related amortization. The
estimated amortization expense for each of the five succeeding fiscal years is expected to be $0.2 million per annum.
Intangible assets with finite useful lives are amortized over
their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
Revenue Recognition
For the Company’s significant accounting policy related
to revenue please see Note 3. Revenue.
Share-Based Compensation
The Company recognizes compensation expense for share-based awards based on the estimated fair value of
the award on the date of grant and the probable attainment of a specified performance condition or over a service period. The Company
uses the Black-Scholes option valuation model to estimate the fair value for purposes of accounting and disclosures. In estimating
this fair value, certain assumptions are used (see Note 11. Share-Based Compensation), including the expected life of the
option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of different estimates for any one of
these assumptions could have a material impact on the amount of reported compensation expense.
Income Taxes
The Company recognizes income taxes under the asset and liability
method. Deferred income taxes are recognized based on temporary differences between financial reporting and income tax basis of
assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income
or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable
judgment is required in determining when these events may occur and whether recovery of an asset is more likely than not. RGS has
significant net operating loss carry-forwards and evaluates at the end of each reporting period whether it expects it is more likely
than not that the deferred tax assets will be fully recoverable and provides a tax valuation allowance as necessary. A valuation
allowance is established if it is more likely than not that a deferred tax asset will not be realized. In determining the
appropriate valuation allowance, the Company considered projected realization of tax benefits based on expected levels of future
taxable income, available tax planning strategies, and its overall deferred tax position. To identify any uncertain tax positions,
the Company reviews (1) the decision to exclude from the tax return certain income or transactions; (2) the assertion that a particular
equity restructuring (e.g., a spin-off transaction) is tax-free when that position might actually be uncertain, and; (3) the decision
not to file a tax return in a particular jurisdiction for which such a return might be required in tax years that are still subject
to assessment or challenge under relevant tax statutes. The Company recognizes the effect of income tax positions only if those
positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that
is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change
in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling,
general, and administrative expenses when applicable.
Warranties
The Company warrants its EPC solar energy systems sold to customers
for up to 10 years against defects in installation workmanship. The manufacturers’ warranties on the solar energy system
components, which are typically passed through to the customers, typically have product warranty periods of 10 years and a limited
performance warranty period of 25 years. The Company generally provides for the estimated cost of warranties at the time the related
revenue is recognized. The Company also maintains specific warranty liabilities for large commercial customers. The Company assesses
the accrued warranty reserve quarterly and adjusts the amounts as necessary based on actual experience and changes in future estimates.
The Company’s manufacturing warranties for its POWERHOUSE™
solar shingle, are an 11-year product warranty, which is the standard product warranty of most traditional solar panels today,
and a 24-year power production warranty. The Company receives warranties from its supply chain matching the terms of the POWERHOUSE™
solar shingle warranty. As of December 31, 2018, there were no POWERHOUSE™ sales which required an estimate of warranty liability.
Net Loss per Share
RGS computes net loss per share by dividing net income (loss) by the weighted average number of shares
of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if options
or warrants to issue shares of the Company’s Class A common stock were exercised. Common share equivalents of 10,445,294
and 5,857,861 shares have been omitted from net loss per share for 2018 and 2017, respectively, as they are anti-dilutive. The
Series O warrants, Series Q warrants, and the 2018 Notes are considered participating securities, and as such, are entitled to
participate in any dividends or distribution of assets made by the Company. There was no effect on earnings per share for these
participating securities as the Company operated with a net loss for both 2018 and 2017. See Note 8. Shareholders’ Equity
for a description of these transactions.
The following table sets forth the computation of basic and
diluted net income (loss) per share:
|
|
For the Years Ended December 31,
|
|
(In thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
Numerator for basic and diluted net loss per share
|
|
$
|
(42,084
|
)
|
|
$
|
(17,700
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares for basic net loss per share
|
|
|
35,618
|
|
|
|
6,950
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Weighted average of common stock, stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
Denominators for diluted net loss per share
|
|
|
35,618
|
|
|
|
6,950
|
|
Net loss per share—basic and diluted
|
|
$
|
(1.18
|
)
|
|
$
|
(2.55
|
)
|
Segment Information
Operating segments are defined as components of a company about
which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making
group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is
the executive team. Based on the financial information presented to and reviewed by the chief operating decision maker in deciding
how to allocate the resources and in assessing the performance of the Company, the Company has determined that it has three reporting
segments: Solar Division, POWERHOUSE™ and corporate expenses (“other segment”).
Common Stock Warrants
The Company accounts for common stock warrants 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 redemption provisions that are outside the control of the Company. The Company classifies
these warrant liabilities with maturities of five years on the Consolidated Balance Sheet as long-term liabilities. They are revalued
at each balance sheet date after their initial issuance with changes in the value recorded in earnings. The Company used a Monte
Carlo pricing model to value these warrant liabilities. The Company also has issued common stock warrants which have been classified
in equity. Upon exercise of the warrants, the Company determines the fair value of the warrants exercised using the share price
and records the impact to common stock and additional paid-in capital.
Derivatives
The Company’s
Senior
Convertible Notes issued on April 9, 2018 (the "2018 Notes") contained conversion features and various redemption clauses
that were required to be bifurcated and were initially measured and recorded at fair value and were revalued at each balance sheet
date with changes in the value recorded in earnings. Each of the 2018 Notes gave the holder the right to convert the 2018 Notes
into shares of Class A common stock at a set strike price (“conversion feature”). In addition to the conversion feature,
redemption of the 2018 Notes could have been triggered by failure to notify the holders timely of a change in control, subsequent
placement and failure to timely deliver shares to convert the 2018 Notes. The Company used a Lattice pricing model to value these
derivative liabilities. The Lattice pricing model, which is based, in part, upon unobservable inputs for which there is little
or no market data, required the Company to develop its own assumptions. Upon completing our fair value estimate of the derivative
liabilities, the Company determined that the fair value exceeded the cash proceeds received and recorded a loss upon issuance.
This loss was recorded within the “Change in fair value of derivative liabilities and loss on debt extinguishment”
in our Consolidated Statements of Operations and the derivative liabilities are classified as short-term in the Consolidated Balance
Sheet as of December 31, 2018, due to their maturity in April 2019. Upon exercise of the conversion option, the derivative liabilities
and related debt host were accounted for as an extinguishment whereby a gain or loss was recognized in an amount equal to the
difference between the recorded value of the liabilities and the fair value of the consideration issued to extinguish them.
Residential Leases
To determine lease classification, the Company evaluates lease
terms to determine whether there is a transfer of ownership or bargain purchase option at the end of the lease, whether the lease
term is greater than 75% of the useful life, or whether the present value of minimum lease payments exceed 90% of the fair value
at lease inception. The Company’s leased systems are treated as sales-type leases under GAAP accounting policies due to the
present value of their minimum lease payments exceeding 90% of the fair value at lease inception.
Financing receivables are generated by solar energy systems
leased to residential customers under sales-type leases. Financing receivables represents gross minimum lease payments to be received
from customers over a period commensurate with the remaining lease term of up to 20 years and the systems estimated residual value,
net of allowance for estimated losses. Initial direct costs for sales-type leases are recognized as cost of sales when the solar
energy systems are placed in service.
For systems classified as sales-type leases, the net present
value of the minimum lease payments, net of executory costs, is recognized as revenue when the lease is placed in service. This
net present value as well as the net present value of the residual value of the lease at termination are recorded as other assets
in the Consolidated Balance Sheet. The difference between the initial net amounts and the gross amounts are amortized to revenue
over the lease term using the interest method. The residual values of the Company’s solar energy systems are determined at
the inception of the lease applying an estimated system fair value at the end of the lease term.
RGS considers the credit risk profile for its lease customers
to be homogeneous due to the criteria the Company uses to approve customers for its residential leasing program, which among other
things, requires a minimum “fair” FICO credit quality. Accordingly, the Company does not regularly categorize its financing
receivables by credit risk.
Recently Issued Accounting Standards
ASU 2018-20, ASU 2018-11, ASU 2018-01 and ASU 2016-02
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU)
No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements.
Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10,
Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use
model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term
longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification
of expense recognition in the income statement. The new standard is effective for the Company on January 1, 2019. A modified retrospective
transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity
may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial
statements as its date of initial application. The Company has adopted the new standard on January 1, 2019 and used the effective
date as its date of initial application. Consequently, financial information will not be updated and the disclosures required under
the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional
practical expedients in transition. The Company has elected the ‘package of practical expedients’. The Company expects
that this standard will have a material effect on our financial statements for contracts in which the Company is the lessee. While
the Company continues to assess all of the effects of adoption, the Company currently believe the most significant effects relate
to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate and vehicle operating leases
and (2) providing significant new disclosures about our leasing activities. The Company has made an accounting policy election
to exclude immaterial leases from lease accounting and will continue to expense them as incurred similar to our capitalization
policy. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has elected the
short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will
not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term
leases of those assets in transition. The Company has also elected the practical expedient to not separate lease and non-lease
components for all of our leases.
The accounting standards noted above also requires
lessors to classify leases as sales-type, direct financing or operating leases. The Company currently holds leases of solar systems
where it is the lessor. While the Company continues to evaluate certain aspects of the new standard, it does not expect the new
standard to have a material effect on its financial statements for contracts where the Company is the lessor and it does not expect
a significant change in our sales-type leasing activities between now and adoption. The Company believes substantially all of its
leases will continue to be classified as sales-type leases under the new standard. While the new standard identifies maintenance
as a non-lease component of equipment lease contracts, the Company will account for solar system leases and associated maintenance
service components as a single, combined lease component. Consequently, the Company does not expect the new standard’s changed
guidance on contract components to significantly affect its financial reporting.
ASU 2017-11
On July 13, 2017, the FASB issued Accounting Standards Update
No. 2017-11 (“ASU 2017-11”),
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
The amendments in Part I of ASU 2017-11 change the
classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining
whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer
precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments
also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part II of ASU 2017-11 recharacterize
the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a
scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of ASU
2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments
in Part II of ASU 2017-11 do not require any transition guidance because those amendments do not have an accounting effect. The
Company will assess the impact of ASU 2017-11 on any derivative instruments entered into in the future.
Recently Adopted Accounting Standards
ASU 2017-04
On January 26, 2017, the 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. The guidance 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. The Company early adopted ASU 2017-04 during the second quarter of 2018 while performing its annual impairment
test. As a result, the Company fully impaired the Goodwill balance charging an impairment loss to the consolidated statement of
operations.
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. The Company adopted 2014-09 as of January 1, 2018 and utilized the
modified retrospective method. See Note 3. Revenue below for all required disclosures.
3. Revenue
Effective January 1, 2018, the Company has adopted “ASC
606 –
Revenue from Contracts with Customers
” related to revenue recognition. Under the standard, revenue is
recognized 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 using a five-step model to achieve that principle. In
addition, the standard requires disclosures to understand the nature, amount, timing, and uncertainty of revenue and cash flows
arising from contracts with customers. The Company has elected to adopt the modified retrospective method for transitioning this
accounting standard which requires that the cumulative effect of applying the revenue standard to existing contracts be recorded
as an adjustment to retained earnings. Based on the Company’s review of contracts that were not substantially completed on
December 31, 2017, there was no impact to the opening retained earnings balance.
Deferred Revenue
When the Company receives consideration, or such consideration
is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract,
it records deferred revenue, which represents a contract liability. The Company recognizes deferred revenue as net sales after
it has satisfied its performance obligations to the customer and all revenue recognition criteria are met.
Revenue Recognition – Installation of photovoltaic
modules (“PV”) solar systems
The Company uses standard contract templates to initiate
sales with customers and determined that each project started during the year ended December 31, 2018 and each project that was
not substantially complete at the adoption date, contains one performance obligation. Although the contract states multiple services
which are capable of being distinct, they are considered a single integrated output to the customer which is customized for each
customer. As such all the services promised within a contract are considered one performance obligation. The Company generally
recognizes revenue for installation of PV solar systems over time following the transfer of control to the customer which typically
occurs as the PV solar system is being installed. If control transfers over time, revenue is recognized based on the extent of
progress towards the completion of the performance obligation. The method utilized by the Company to measure the progress towards
completion requires judgment and is based on the products and services provided. The Company utilizes the input method to measure
the progress of its contracts because it best depicts the transfer of assets to the customer which incurs as materials are consumed
by the project. The input method measures the progress towards completion based on the ratio of costs incurred to date (“actual
cost”) to the total estimated costs (“budget”) at completion of performance obligation. Revenue, including estimated
fees, are recorded proportionally as costs are incurred. Costs to fulfill include materials, labor and/or subcontractors’
costs, and other direct costs. Indirect costs and costs to procure the panels, inverters, and other system miscellaneous costs
needed to satisfy the performance obligation are excluded since the customer does not gain control of those items until delivered
to the site. Including the costs of those items would overstate the extent of our performance.
Each project’s transaction price is included
within the contract and although there is only one performance obligation, changes to the contract price could take place after
fulfillment of performance obligation. The Company has considered financing components on projects started during the year ended
December 31, 2018 and elected the use of a practical expedient where an entity need not adjust the promised amount of consideration
for the effects of a significant financing component if the entity expects, at contract inception, that the period between when
the entity transfers a promised service to the customer and when the customer pays for that good or service will be one year or
less. Typically, the payments are received as the performance obligation is being satisfied with a final payment received after
the solar system has been installed. All receivables from projects are expected to be received within one year from project completion
and there were no adjustments to the contract value.
Under ASC 606, the Company is required to recognize
as an asset the incremental costs of obtaining a contract with a customer if those costs are expected to be recovered. The Company
incurs sales commissions that otherwise would not have been incurred if the contract had not been obtained. These costs are recoverable;
however, the Company has elected the use of a practical expedient to expense these costs as incurred as the amortization period
of the asset would be less than one year.
Revenue Recognition – Operations & Maintenance
The Company generally recognizes revenue for standard,
recurring commercial operations and maintenance services over time as customers receive and consume the benefits of such services,
which typically include corrective maintenance, data hosting or energy/deck monitoring services for a period. These services are
treated as stand-ready performance obligations and are satisfied evenly over the length of the agreement, so the Company has elected
a time-based method to measure progress and recorded revenue using a straight-line method.
Revenue Recognition – Service & Warranty
Warranties for workmanship and roof penetration are
included within each contract. These warranties cannot be purchased separately from the related services, are intended to safeguard
the customer against workmanship defects and does not provide any incremental service to the customer. It is necessary for the
Company to perform the specified tasks to provide assurance that the final product complies with agreed-upon specifications and
likely do not give rise to a separate performance obligation. The Company will continue to account for any related warranties in
accordance with ASC 460-10 and record an accrual for potential warranty costs at the completion of a project. Any services provided
to a customer outside of warranties such as system inspections are recognized upon completion of the service.
Adoption of the standard related to revenue recognition had no impact to cash from or used in operating,
financing, or investing on our consolidated cash flows statements.
In
the following table, revenue is disaggregated by primary geographical market and includes a reconciliation of the disaggregated
revenue with the reportable segments for the years ended December 31, 2018 and 2017.
Reportable Segments
|
December 31, 2018
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical Regions
|
|
Solar Division
|
|
|
POWERHOUSE™
|
|
|
Total reportable segments
|
|
|
All other segments
|
|
|
Total
|
|
East
|
|
$
|
10,022
|
|
|
$
|
-
|
|
|
$
|
10,022
|
|
|
$
|
-
|
|
|
$
|
10,022
|
|
West
|
|
|
2,681
|
|
|
|
-
|
|
|
|
2,681
|
|
|
|
25
|
|
|
|
2,706
|
|
|
|
$
|
12,703
|
|
|
$
|
-
|
|
|
$
|
12,703
|
|
|
$
|
25
|
|
|
$
|
12,728
|
|
Reportable Segments
|
December 31, 2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical Regions
|
|
Solar Division
|
|
|
POWERHOUSE™
|
|
|
Total reportable segments
|
|
|
All other segments
|
|
|
Total
|
|
East
|
|
$
|
12,324
|
|
|
$
|
-
|
|
|
$
|
12,324
|
|
|
$
|
-
|
|
|
$
|
12,324
|
|
West
|
|
|
3,262
|
|
|
|
-
|
|
|
|
3,262
|
|
|
|
6
|
|
|
|
3,268
|
|
|
|
$
|
15,586
|
|
|
$
|
-
|
|
|
$
|
15,586
|
|
|
$
|
6
|
|
|
$
|
15,592
|
|
4. Property and Equipment
Property and equipment, stated at lower of cost or estimated
fair value, consists of the following as of December 31:
(in thousands)
|
|
2018
|
|
|
2017
|
|
Buildings and leasehold improvements
|
|
$
|
441
|
|
|
$
|
441
|
|
Furniture, fixtures and equipment
|
|
|
1,832
|
|
|
|
1,811
|
|
Software
|
|
|
2,135
|
|
|
|
2,135
|
|
Vehicles and machinery
|
|
|
1,142
|
|
|
|
1,167
|
|
Total property and equipment
|
|
|
5,550
|
|
|
|
5,554
|
|
Accumulated depreciation and amortization
|
|
|
(4,772
|
)
|
|
|
(4,400
|
)
|
Total property and equipment, net
|
|
$
|
778
|
|
|
$
|
1,154
|
|
Depreciation on other property, plant and equipment is calculated
using the straight-line method to allocate their depreciable amounts over their estimated useful lives as follows:
|
|
Useful lives
|
Buildings
|
|
40 years
|
Leasehold improvements
|
|
3-5 years
|
Furniture, fixtures and equipment
|
|
3-5 years
|
Software
|
|
3-15 years
|
Vehicles and machinery
|
|
2-7 years
|
For the years ended December 31, 2018 and 2017, depreciation
expense was $0.4 million per annum.
5. Accrued Liabilities
Accrued expenses consist of the following:
(in thousands)
|
|
2018
|
|
|
2017
|
|
Accrued Expenses
|
|
$
|
924
|
|
|
$
|
524
|
|
Accrued Compensation
|
|
|
476
|
|
|
|
690
|
|
Other
|
|
|
69
|
|
|
|
130
|
|
Accrued Project Costs
|
|
|
102
|
|
|
|
130
|
|
Total
|
|
$
|
1,571
|
|
|
$
|
1,474
|
|
6. Related Parties
On May 23, 2017, the Company entered into an agreement with
Mobomo, LLC (“Mobomo”) pursuant to the design and development of intellectual property at a cost of $0.5 million. The
intellectual property consisted of an integrated mobile phone application and the new RGS 365™ customer portal. In 2018,
Mobomo continued to provide data hosting services which totaled approximately $20,000.
Mobomo’s Chief Executive Officer Brian Lacey is the son
of the Company’s CEO Dennis Lacey. The Company approved the agreement in accordance with its related-party transaction policy.
7. 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 through operating leases for certain
field personnel. Leases range up to five years with varying termination dates through May 2022.
The following schedule represents the annual future minimum
payments of all leases as of December 31, 2018:
|
|
Future Minimum
|
|
(in thousands)
|
|
Lease Payments
|
|
2019
|
|
$
|
848
|
|
2020
|
|
|
505
|
|
2021
|
|
|
378
|
|
2022
|
|
|
112
|
|
2023 and thereafter
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
1,843
|
|
The Company incurred office and warehouse rent expense of $0.6
million and $0.7 million for the years ended December 31, 2018 and 2017, respectively. The Company incurred automobile lease
expense of $0.3 million and $0.4 million for the years ended December 31, 2018 and 2017, 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.
8. Shareholders’ Equity
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, 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 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.
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 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 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.
January 2018 Offering
On January 4, 2018, the Company closed
a $1.8 million offering and sale of (a) 800,000 shares of Class A common stock, (b) a prepaid Series P Warrant to purchase 800,000
shares of Class A common stock, and (c) a Series O Warrant to purchase 1,600,000 shares of Class A common stock, pursuant to the
Securities Purchase Agreement, dated as of January 2, 2018, by and between the Company and one unaffiliated institutional and accredited
investor. The purchase price was $1.15 per share of Class A common. The Company received net proceeds of approximately $1.5 million
at the closing, after deducting commissions to the placement agents and estimated offering expenses associated with the offering.
2018 Convertible Note Offering
On March 30, 2018, the Company entered into a Securities Purchases
Agreement with two unaffiliated institutional and accredited investors for a private placement (the "2018 Notes Offering",
see Note 9) of up to $10.75 million in principal amount and $10 million funding amount (reflecting $750,000 of original issue
discount) of the 2018 Notes, and Series Q Warrants to purchase 9,270,457 shares of Class A Common Stock. As of December 31, 2018,
a total of 73 million shares of Class A common stock had been issued upon conversion of the 2018 Notes, and 8.7 million shares
of Class A common stock had been issued upon exercise of the Series Q warrants in exchange for gross proceeds of $8.7 million,
before placement agent fees and other expenses.
Option Exercises, 2018 Convertible
Note Conversions and Warrant Exercises
During the twelve months ended December 31, 2018, the Company issued stock options as discussed in Note
11. Share-Based
Compensation. During the twelve months
ended December 31, 2018, the Company issued 800,000 shares of its Class A common stock upon exercise of Series P warrants and 81,507,793
shares upon conversion of the 2018 Notes and exercise of Series Q warrants.
At December 31, 2018, RGS had the following shares of Class A
common stock reserved for future issuance:
Stock options and grants outstanding under incentive plans
|
|
|
1,206,645
|
|
Common stock warrants outstanding
|
|
|
8,714,871
|
|
2018 Notes outstanding - derivative liability
|
|
|
1,726,423
|
|
Total shares reserved for future issuance
|
|
|
11,647,939
|
|
The table below summarizes the Company’s warrant activity:
|
|
Issuances
|
|
Warrants outstanding at December 31, 2016
|
|
|
682,693
|
|
Issuances
|
|
|
8,178,580
|
|
Exercised
|
|
|
(3,007,412
|
)
|
Warrants outstanding at December 31, 2017
|
|
|
5,853,861
|
|
Issuances
|
|
|
12,385,143
|
|
Expired
|
|
|
(42,465
|
)
|
Exercised
|
|
|
(9,481,668
|
)
|
Warrants outstanding at December 31, 2018
|
|
|
8,714,871
|
|
9. Convertible Debt
2018 Convertible Note Offering
On March 30, 2018, the Company entered into a Securities Purchase
Agreement with two unaffiliated institutional and accredited investors for a private placement (the "2018 Note Offering")
of up to $10.75 million in principal amount and $10 million funding amount (reflecting $750,000 of original issue discount) of
Series A Senior Convertible Notes (“Series A Notes”), Series B Senior Secured Convertible Notes (“Series B Notes,”
and collectively with the Series A Notes, the “2018 Notes”), and Series Q warrants (the “Series Q Warrants”)
to purchase 9,126,984 shares of Class A Common Stock. On April 9, 2018, the Company closed the 2018 Note Offering. At the closing
on April 9, 2018, the Company received $5 million of the gross proceeds and two secured promissory notes, one note from each investor,
in a combined aggregate amount of $5 million (each, an “Investor Note”), secured by cash and/or securities held in
investor accounts. These Investor Notes are presented net of the convertible debt carrying amount on the Consolidated Balance
Sheets due to right of offset. All amounts outstanding under the 2018 Notes matured and were due and payable on or before the
one-year anniversary of the issuance of the 2018 Notes (“Maturity Date”).
The 2018 Notes did not incur interest other than upon the occurrence
of an event of default, in which case the 2018 Notes bore interest at 18% per year (“Interest Rate”). The 2018 Notes
were convertible at any time, at the option of the holders, into shares of Common Stock at a conversion price. The initial fixed
conversion price (“ICP”) was $1.2405 per share, subject to reduction, as described below, and adjustment for stock
splits, stock dividends, and similar events.
The ICP of the 2018 Notes were subject to reduction subsequent to
shareholder approval. On June 21, 2018 the Company held its 2018 annual shareholder meeting at which time the shareholders approved
the 2018 Note Offering and thereby initiating a reset period which enabled the note holders to earn additional amounts (“Additional
Amounts”), effectively a make-whole for amounts previously converted. As a result of the shareholder approval, the conversion
price of the 2018 Notes and the exercise price of the Series Q Warrants were reset. Subsequent to that date, the Company agreed
to permanently reduce the conversion price of the 2018 Notes from $0.3223 to $0.3067 effective on August 27, 2018. The 2018 Notes
were convertible at any time, at the option of the holder, into shares of the Company’s Class A common stock at a conversion
price equal to $0.3067. The Series Q Warrants were exercisable into shares of the Company’s Class A common stock at an exercise
price of $0.3223 per share.
If the Company were to have consummated a Subsequent Placement,
subject to some exceptions, a Note holder would have had the right to require that the Company redeem, in whole or in part, a portion
of the amounts owed by the Company to such holder under a Note in cash. A Note holder could also have required the Company to redeem
all or a portion of its 2018 Note in connection with a transaction resulting from a Change of Control and upon the occurrence of
an event of default.
The 2018 Notes contained customary events of default, including
but not limited to: (i) failure to file or have declared effective by the SEC the applicable registration statement required by
the Registration Rights Agreement within certain time periods or failure to keep the registration statement effective as required
by the Registration Rights Agreement, (ii) failure to maintain the listing of the Common Stock, (iii) failure to make payments
when due under the Notes, (iv) breaches of covenants, and (iv) bankruptcy or insolvency. The occurrence of an event of default
under the 2018 Notes would have triggered default interest and would have caused an Equity Condition Failure, which may mean that
the Company would have been unable to force mandatory conversion of the Notes and that Note Holders may not be required to prepay
the Investor Note under a mandatory prepayment event. Following an event of default, Note holders could have required the Company
to redeem all or any portion of their Notes in cash at a conversion price equal to the greater of (i) 125% of the amount to be
redeemed, and (ii) the product of (A) the amount to be redeemed divided by the conversion price, multiplied by (B) the product
of (x) 125% multiplied by (y) the greatest closing sale price of the Common Stock on any trading day during the period commencing
on the date immediately preceding such event of default and ending on the date the Company makes the entire redemption payment.
The principal amount of the Series B Notes was considered restricted
principal until collection of the Investor Notes was received by the Company (“Restricted Principal”). Upon any offset,
the restricted principal under a Series B Note would automatically and simultaneously be reduced, on a dollar-for-dollar basis,
in an amount equal to the principal amount of an investor’s Investor Note cancelled and offset. Under the terms of the
Series B Notes, the Company granted a security interest to each investor in such investor’s Investor Note to secure the Company’s
obligations under the applicable Series B Note. Each investor perfected its security interest by taking possession of such investor’s
Investor Note at the closing.
Each Series Q Warrant is immediately exercisable and will expire
five years from the date of issuance. Initially, only 75% of the shares of Common Stock issuable upon exercise of a Series Q Warrant
may be exercised, which amount increases upon an investor’s prepayment under such investor’s Investor Note. A holder
may not exercise any of the Series Q Warrants, and the Company may not issue shares of Common Stock upon exercise of any of the
Series Q Warrants if, after giving effect to the exercise, a holder together with (i) any investment vehicle, including, any funds,
feeder funds or managed accounts, currently, or from time to time after the issuance date, directly or indirectly managed or advised
by the holder’s investment manager or any of its affiliates or principals, (ii) any direct or indirect affiliates of the
holder or any of the foregoing, (iii) any person acting or who could be deemed to be acting as a group together with the holder
or any of the foregoing and (iv) any other persons whose beneficial ownership of the Company’s Common Stock would or could
be aggregated with the holder’s and certain other “Attribution Parties” would beneficially own in excess of 4.99
or 9.99%, as elected by each investor at closing, of the outstanding shares of Common Stock. At each holder’s option, the
cap may be increased or decrease to any other percentage not in excess of 9.99%, except that any increase will not be effective
until the 61st day after notice to the Company.
As disclosed in Note 2. Significant Accounting Policies, the warrants
issued in connection with the 2018 Note Offering as well as the embedded derivatives were accounted for as liabilities that had
been initially measured and recorded at fair value and were revalued at each balance sheet date after their initial issuance with
the changes in value recorded in earnings. These conversion options accounted for as embedded derivatives were incorporated into
the 2018 Notes to incentivize the holders to provide the Company with short term funding for POWERHOUSE™. See Note 10. Fair
Value Measurements for information about the techniques the Company uses to measure the fair value of our derivative instruments.
The fair value of the embedded derivatives and Series Q warrants exceeded the proceeds received from the 2018 Notes Offering which
was recognized as a loss within the line item “Change in fair value of derivative liabilities and loss on debt extinguishment”
in the statement of operations.
10. Fair Value Measurements
The Company complies with the provisions of FASB ASC No. 820,
Fair Value Measurements and Disclosures
(“ASC 820”), in measuring fair value and in disclosing fair value measurements
at the measurement date. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements required under other accounting pronouncements. FASB ASC No. 820-10-35, Fair Value Measurements and
Disclosures- Subsequent Measurement (“ASC 820-10-35”), 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
at the measurement date. ASC 820-10-35-3 also requires that a fair value measurement reflect the assumptions market participants
would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a
particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.
ASC 820-10-35 discusses valuation techniques, such as the market
approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost
to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of
those three levels:
Level 1 Inputs – Level 1 inputs are unadjusted
quoted prices in active markets for assets or liabilities identical to those to be reported at fair value. An active market is
a market in which transactions occur for the item to be fair valued with sufficient frequency and volume to provide pricing information
on an ongoing basis.
Level 2 Inputs – Level 2 inputs are inputs
other than quoted prices included within Level 1. Level 2 inputs are observable either directly or indirectly. These inputs include:
(a) Quoted prices for similar assets or liabilities in active markets; (b) Quoted prices for identical or similar assets
or liabilities in markets that are not active, such as when there are few transactions for the asset or liability, the prices are
not current, price quotations vary substantially over time or in which little information is released publicly; (c) Inputs
other than quoted prices that are observable for the asset or liability; and (d) Inputs that are derived principally from
or corroborated by observable market data by correlation or other means.
Level 3 Inputs – Level 3 inputs are unobservable
inputs for an asset or liability. These inputs should be used to determine fair value only when observable inputs are not available.
Unobservable inputs should be developed based on the best information available in the circumstances, which might include internally
generated data and assumptions being used to price the asset or liability.
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 present the fair values of derivative instruments
included in our consolidated balance sheets as of December 31, 2018 and 2017 (in thousands):
Fair Value of Derivative Instruments
|
|
|
Liability Derivatives
|
|
|
2018
|
|
2017
|
|
Balance at December 31, 2018
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
Balance Sheet
Location
|
|
|
Fair Value
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deriviative liability
|
|
Convertible debt, net
|
|
$
|
344
|
|
|
|
N/a
|
|
|
$
|
-
|
|
The Effect of Derivative Instrument
on the Statement of Operations
for the Nine Months Ended December
31, 2018 and 2017
|
|
|
|
Amount of Loss Recognized
in Statement of Operations
|
|
Derivatives not designated as
hedging instruments
|
|
Location of Loss Recognized in
Statement of Operations
|
|
2018
|
|
|
2017
|
|
2018 Notes Conversion Options
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities and loss on debt extinguishment
|
|
$
|
(27,134
|
)
|
|
$
|
-
|
|
|
|
Amortization of debt discount & deferred loan costs
|
|
|
(1,042
|
)
|
|
|
-
|
|
|
|
|
|
$
|
(28,176
|
)
|
|
$
|
-
|
|
The Company accounts for Series Q warrants in accordance with
ASC 480. The Series Q warrants are accounted for as liabilities due to provisions in the warrants allowing the warrant holders
to request redemption, upon a change of control, and failure to timely deliver shares of Class A common stock upon exercise or
default. The Company classifies these warrant liabilities on the 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 warrant liabilities. The Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is
little or no market data, requires the Company to develop its own assumptions.
The
following tables summarize the basis used to measure certain financial assets and liabilities at fair value on a recurring basis
in the consolidated balance sheets:
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Items
|
|
|
Inputs
|
|
|
Inputs
|
|
Balance at December 31, 2018 (in thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Common stock warrant liability
|
|
$
|
511
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
511
|
|
Derivative liability
|
|
|
344
|
|
|
|
-
|
|
|
|
-
|
|
|
|
344
|
|
|
|
$
|
855
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
855
|
|
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 December 31, 2018:
|
|
|
|
|
Embedded
|
|
|
|
|
|
|
Common Stock
|
|
|
derivative
|
|
|
|
|
(in thousands)
|
|
warrant liability
|
|
|
liability
|
|
|
Total
|
|
Fair value of financial liabilities at December 31, 2017
|
|
$
|
76
|
|
|
$
|
-
|
|
|
$
|
76
|
|
Common stock warrant liability
|
|
|
6,818
|
|
|
|
-
|
|
|
|
6,818
|
|
Expiration of common stock warrant liabilities
|
|
|
(48
|
)
|
|
|
-
|
|
|
|
(48
|
)
|
Change in the fair value of common stock warrant liabilities, net
|
|
|
(1,940
|
)
|
|
|
-
|
|
|
|
(1,940
|
)
|
Adjustment for exercise of common stock warrant liabilities
|
|
|
(4,395
|
)
|
|
|
-
|
|
|
|
(4,395
|
)
|
Derivative liability
|
|
|
-
|
|
|
|
3,195
|
|
|
|
3,195
|
|
Investor Notes
|
|
|
|
|
|
|
(109
|
)
|
|
|
(109
|
)
|
Change in the fair value of derivative liabilities and additional amounts earned
|
|
|
-
|
|
|
|
17,910
|
|
|
|
17,910
|
|
Conversions of 2018 Notes
|
|
|
-
|
|
|
|
(20,652
|
)
|
|
|
(20,652
|
)
|
Fair value of financial liabilities at December 31, 2018
|
|
$
|
511
|
|
|
$
|
344
|
|
|
$
|
855
|
|
2018 Notes Derivative Liability
The fair value of the 2018 Notes derivative liabilities was
derived using a Lattice pricing model, which 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 assumptions used on April 9, 2018, June 30, 2018, September 30,
2018 and December 31, 2018 to value the derivative liabilities are as follows:
|
|
Conversion
Price
|
|
|
Closing
Market
Price
(average)
|
|
|
Risk-free
Rate
|
|
|
Dividend
Yield
|
|
|
Market
Price
Volatility
|
|
|
Remaining
Term
(years)
|
|
|
Debt
Yield
|
|
|
Soft
Call
Threshold
|
|
|
First
Redemption
Period
|
|
|
Second
Redemption
Period
|
|
Derivative Liability April 09, 2018
|
|
$
|
1.26
|
|
|
$
|
0.85
|
|
|
|
2.08
|
%
|
|
|
0.00
|
%
|
|
|
110
|
%
|
|
|
1.00
|
|
|
|
60
|
%
|
|
$
|
2.52
|
|
|
|
20
|
%
|
|
|
25
|
%
|
Derivative Liability June 30, 2018
|
|
$
|
0.55
|
|
|
$
|
0.57
|
|
|
|
2.23
|
%
|
|
|
0.00
|
%
|
|
|
130
|
%
|
|
|
0.78
|
|
|
|
60
|
%
|
|
$
|
2.52
|
|
|
|
20
|
%
|
|
|
25
|
%
|
Derivative Liability September 30, 2018
|
|
$
|
0.31
|
|
|
$
|
0.39
|
|
|
|
2.36
|
%
|
|
|
0.00
|
%
|
|
|
125
|
%
|
|
|
0.53
|
|
|
|
60
|
%
|
|
$
|
2.52
|
|
|
|
20
|
%
|
|
|
25
|
%
|
Derivative Liability December 31, 2018
|
|
$
|
0.31
|
|
|
$
|
0.52
|
|
|
|
2.45
|
%
|
|
|
0.00
|
%
|
|
|
90
|
%
|
|
|
0.28
|
|
|
|
60
|
%
|
|
$
|
2.52
|
|
|
|
20
|
%
|
|
|
25
|
%
|
Common Stock Warrants
The fair value of Series Q Warrants was derived using a Monte
Carlo pricing model, which 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 assumptions used on April 9, 2018, June 30, 2018, September 30, 2018 and December 31,
2018 to value the common stock warrant liabilities are as follows:
|
|
Exercise
Price
|
|
|
Strike Floor
|
|
|
Closing
Market Price
(average)
|
|
|
Risk-free
Rate
|
|
|
Dividend
Yield
|
|
|
Market
Price
Volatility
|
|
|
Remaining
Term
(years)
|
|
Warrant Liability April 09, 2018
|
|
$
|
1.12
|
|
|
$
|
0.97
|
|
|
$
|
0.85
|
|
|
|
2.60
|
%
|
|
|
0.00
|
%
|
|
|
120
|
%
|
|
|
5.00
|
|
Warrant Liability June 30, 2018
|
|
$
|
0.55
|
|
|
$
|
0.19
|
|
|
$
|
0.57
|
|
|
|
2.72
|
%
|
|
|
0.00
|
%
|
|
|
115
|
%
|
|
|
4.78
|
|
Warrant Liability September 30, 2018
|
|
$
|
0.32
|
|
|
$
|
0.19
|
|
|
$
|
0.39
|
|
|
|
2.93
|
%
|
|
|
0.00
|
%
|
|
|
115
|
%
|
|
|
4.53
|
|
Warrant Liability December 31, 2018
|
|
$
|
0.32
|
|
|
|
N/a
|
|
|
$
|
0.52
|
|
|
|
2.49
|
%
|
|
|
0.00
|
%
|
|
|
120
|
%
|
|
|
4.28
|
|
2018 Options
The determination of the estimated fair value of the 2018 Options
(as defined in Note 10) using the Black-Scholes option-pricing model was affected by the Company’s stock price as well as
assumptions regarding a number of complex and subjective variables. Expected volatilities were based on a value calculated using
the historical stock price volatility. Expected life was based on the specific vesting terms of the option and anticipated changes
to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model was based
on U.S. Treasury zero-coupon securities with remaining terms similar to the expected term on the options. RGS does not anticipate
paying any cash dividends on its Class A common stock in the foreseeable future and, therefore, an expected dividend yield
of zero was used in the option valuation model. The assumptions used to value to 2018 Options as of December 31, 2018 are as follows:
2018 Non-Qualified Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Vesting
Period
|
|
Expected
Life
|
|
Expected
Dividend
Rate
|
|
|
Risk-free
Rate
|
|
|
Market
Price
Volatility
|
|
June 21, 2018
|
|
2.78 years
|
|
4.2 years
|
|
|
0
|
%
|
|
|
2.70
|
%
|
|
|
148.77
|
%
|
September 4, 2018
|
|
2.82 years
|
|
5.7 years
|
|
|
0
|
%
|
|
|
2.78
|
%
|
|
|
147.40
|
%
|
September 10, 2018
|
|
2.81 years
|
|
5.7 years
|
|
|
0
|
%
|
|
|
2.83
|
%
|
|
|
146.66
|
%
|
October 15, 2018
|
|
2.96 years
|
|
4.3 years
|
|
|
0
|
%
|
|
|
2.96
|
%
|
|
|
149.82
|
%
|
October 29, 2018
|
|
2.92 years
|
|
4.3 years
|
|
|
0
|
%
|
|
|
2.87
|
%
|
|
|
150.34
|
%
|
Nonrecurring Fair Value Measurements
The Company tests its long-lived assets
for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable
or that the carrying value may exceed its fair value.
As described in Note 12. Goodwill Impairment, during the second quarter of 2018, the Company recorded
a $1.3 million impairment charge related to goodwill measured at fair value on a nonrecurring basis. When recognizing an impairment
charge, the carrying value of the asset is reduced to fair value and the difference is recorded within operating earnings in our
consolidated statements of operations. The fair value measurements included in the indefinite-lived intangible impairments were
primarily based on significant unobservable inputs (Level 3) developed using company-specific information.
Other Financial Instruments
The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable,
accounts payable, deferred revenue and convertible debt. The carrying values of these financial instruments approximate their fair
values, due to their short-term nature.
11. Share-Based Compensation
At December 31, 2017, the Company’s 2008 Long-Term
Incentive Plan provided that an aggregate of 52,536 shares of its Class A common stock could be issued or subject to awards
under the plan. Employees, members of the Board of Directors, consultants, service providers and advisors were eligible to participate
in the 2008 Long-Term Incentive Plan. The 2008 Long-Term Incentive Plan expired under its terms in 2018. All outstanding options
are nonqualified and were generally granted with an exercise price equal to the closing market price of the Company’s Class
A common stock on the date of the grant. Options vest based on service conditions, performance (attainment of a certain amount
of pre-tax income for a given year), or some combination thereof. Grants typically expire seven years from the date of grant.
On June 21, 2018, Company shareholders approved the Real Goods
Solar 2018 Long-Term Incentive Plan (the “2018 Incentive Plan”) which allows the Company to issue, or grant awards
for, up to 1,300,000 shares of Class A common stock. Employees or individuals who perform services for the Company are eligible
to participate in the 2018 Incentive Plan, which terminates upon the earlier of a board resolution terminating the 2018 Incentive
Plan or ten years after the effective date of June 21, 2018, unless extended by action of the Board of Directors for up to an
additional five years. All options are non-qualified and are generally granted with an exercise price equal to the closing market
price of the Company’s Class A common stock on the date of the grant. Under the 2018 Incentive Plan, the Company granted
multiple non-qualified stock options (“2018 Options”) with various requisite service periods, described in Note 9
Fair Value Measurements, which expire seven years from the grant date. On the last day of each calendar quarter occurring after
the grant date, the 2018 Options will vest at 8.3% contingent on continuous employment. The 2018 Options are classified as equity
and measured using the “fair-value-based method” with share-based compensation expense recognized in the income statement
on a straight-line basis over the requisite service for the entire award.
The determination of the estimated fair value of share-based
payment awards on the date of grant using the Black-Scholes option-pricing model is affected by the Company’s stock price
as well as assumptions regarding a number of complex and subjective variables. Expected volatilities are based on a value calculated
using the combination of historical volatility of comparable public companies in RGS’ industry and its stock price volatility
since the Company’s initial public offering. Expected life is based on the specific vesting terms of the option and anticipated
changes to market value and expected employee exercise behavior. The risk-free interest rate used in the option valuation model
is based on U.S. Treasury zero-coupon securities with remaining terms similar to the expected term on the options. RGS does not
anticipate paying any cash dividends on its Class A common stock in the foreseeable future and, therefore, an expected dividend
yield of zero is used in the option valuation model. RGS is required to estimate forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ from those estimates. In accordance with ASC 718, an entity can make
an accounting policy to either estimate the number of awards that are expected to vest or account for forfeitures as they occur.
The Company utilizes the plan life-to-date forfeiture experience rate to estimate option forfeitures and records share-based compensation
expense only for those awards that are expected to vest.
The tables below present a summary of the Company’s option
activity as of December 31, 2018 and 2017 and changes during the years then ended:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(Yrs)
|
|
|
Value
|
|
Outstanding at January 1, 2017
|
|
|
185
|
|
|
$
|
15,736.67
|
|
|
|
3.30
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(36
|
)
|
|
|
4,990.00
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
149
|
|
|
$
|
18,452.38
|
|
|
|
2.60
|
|
|
$
|
-
|
|
Exercisable at December 31, 2017
|
|
|
141
|
|
|
$
|
19,418.30
|
|
|
|
2.80
|
|
|
$
|
-
|
|
Granted
|
|
|
1,331,500
|
|
|
|
0.96
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(125,004
|
)
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,206,645
|
|
|
$
|
3.22
|
|
|
|
6.58
|
|
|
$
|
-
|
|
Exercisable at December 31, 2018
|
|
|
268,189
|
|
|
$
|
11.26
|
|
|
|
6.53
|
|
|
$
|
-
|
|
The Company granted 1,331,500 stock options and cancelled 125,004
stock options and did not grant any stock options and cancelled 36 stock options during 2018 and 2017, respectively. The Company’s
share-based compensation cost charged against income for continuing operations was approximately $0.2 million and $0.2 million
during the years 2018 and 2017, respectively.
12. Goodwill Impairment
The Company performed its annual test
of goodwill as of June 30, 2018, and based on the results of this test, the Company determined that the fair value of the goodwill
no longer exceeded the carrying amount. The fair value was determined using a discounted cash flow valuation technique and resulted
in the full impairment of goodwill of $1.3 million charging an impairment loss to the consolidated statement of operations during
the twelve months ended December 31, 2018.
13. Supplier Concentration
The Company relies on a limited number of third-party suppliers
to provide the components used in our POWERHOUSE™ in-roof solar shingles and our solar energy systems. The production of
POWERHOUSE™ solar laminates, connectors and wire harnesses is concentrated in China so it is reasonably possible that operations
could be disrupted in the future.
14. Income Taxes
On December 22, 2017, The President of the United States signed
the TCJA. The enactment of TCJA requires companies, under Accounting Standards Codification (ASC) 740, Income Taxes, to recognize
the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax
laws in the period in which the new legislation is enacted. The TCJA would permanently reduce the maximum corporate income tax
rate from 35% to 21% effective for tax years beginning after December 31, 2017, and the future benefits of existing deferred tax
assets would need to be computed at the new tax rate. In addition to the change in the corporate income tax rate, the TCJA
further introduced a number of other changes including a one-time transition tax via a mandatory deemed repatriation of post-1986
undistributed foreign earnings and profits; the introduction of a tax on global intangible low-taxed income (“GILTI”)
for tax years beginning after December 31, 2017; the limitation of deductible net interest to 30% of adjustable taxable income;
the further limitation of the deductibility of share-based compensation of certain highly compensated employees; the ability to
elect to accelerate bonus depreciation on certain qualified assets; and the Base Erosion and Anti-Abuse Tax ("BEAT"),
amongst other changes. The Company recognized the income tax effects of the 2017 Tax Act in its financial statements in accordance
with Staff Accounting Bulletin (SAB) No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes.
The Company has finalized its accounting for the income tax effects of the 2017 Tax Act.
The tax effects recorded primarily include an estimate of the
impact of the reduction in the U.S. tax rate on our deferred tax assets and liabilities in 2017. The Company had $0 of income
tax expense (benefit) for the years ended December 31, 2018 and 2017. Variations from the federal statutory rate are as follows:
|
|
Years ended December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Expected federal income tax expense (benefit) at statutory rate of 21% and 35% at December 31, 2018 and 2017, respectively
|
|
$
|
(8,888
|
)
|
|
$
|
(6,191
|
)
|
Effect of permanent other differences
|
|
|
|
|
|
|
|
|
Debt extinguishment
|
|
|
5,145
|
|
|
|
170
|
|
Transaction Cost Amortization
|
|
|
552
|
|
|
|
-
|
|
Other
|
|
|
319
|
|
|
|
(28
|
)
|
Effect of valuation allowance
|
|
|
3,479
|
|
|
|
(12,572
|
)
|
Other
|
|
|
39
|
|
|
|
(1,147
|
)
|
Impact of change in federal tax rate on deferred tax asset
|
|
|
-
|
|
|
|
20,479
|
|
State income tax expense (benefit), net of federal benefit
|
|
|
(646
|
)
|
|
|
(690
|
)
|
|
|
$
|
-
|
|
|
$
|
21
|
|
Deferred income taxes reflect net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The components of the net accumulated deferred income tax assets shown on a gross basis as of December 31, 2018 and 2017 are
as follows:
(in thousands)
|
|
2018
|
|
|
2017
|
|
Deferred tax assets (liabilities)
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
$
|
138
|
|
|
$
|
195
|
|
Inventory-related expense
|
|
|
195
|
|
|
|
209
|
|
Accrued liabilities
|
|
|
367
|
|
|
|
444
|
|
Depreciation and amortization
|
|
|
2,084
|
|
|
|
2,128
|
|
Net operating loss carry-forwards
|
|
|
39,154
|
|
|
|
35,754
|
|
Other
|
|
|
705
|
|
|
|
719
|
|
Total deferred tax assets
|
|
|
42,643
|
|
|
|
39,449
|
|
Valuation allowance
|
|
|
(42,643
|
)
|
|
|
(39,449
|
)
|
Total net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2018, RGS had $140.7 million of federal net operating loss carryforwards expiring,
if not utilized, beginning in 2020 and $14.1 million with no expiration. Additionally, the Company had $142.8 million of state
net operating loss carryforwards expiring, it not utilized, beginning in 2020.
Utilization of the net operating loss carry-forwards may be
subject to annual limitation under applicable federal and state ownership change limitations and, accordingly, net operating losses
may expire before utilization. The Company has not completed a Section 382 analysis through December 2018 and therefore has
not determined the impact of any ownership changes, as defined under Section 382 of the Internal Revenue Code has occurred
in prior years. Therefore, the net operating loss carryforwards above do not reflect any possible limitations and potential loss
attributes to such ownership changes. However, the Company believes that upon completion of a Section 382 analysis, as a result
of prior period ownership changes, substantially all of the net operating losses will be subject to limitation.
The Company’s valuation allowance increased by approximately
$3.5 million for the year ended December 31, 2018 as a result of its operating loss for the year. The valuation allowance was determined
in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both negative and positive evidence
when measuring the need for a valuation allowance. Based upon the available objective evidence and the Company’s history
of losses, management believes it is more likely than not that the net deferred tax assets will not be realized. At December 31,
2018, the Company has a valuation allowance against its deferred tax assets net of the expected income from the reversal of its
deferred tax liabilities.
The Company’s predecessor, Real Goods Trading Corporation,
was acquired by Gaiam, Inc. (now known as Gaia, Inc. and hereinafter as Gaia) in 2001. Gaia operated Real Goods Trading Corporation
essentially as a separate business until 2008 when operations were consolidated into the corporate entity, Real Goods Solar, Inc.,
upon its formation. Following the Company’s initial public offering, a tax sharing agreement was entered into with Gaia.
The Company is required, under the terms of its tax sharing agreement with Gaia, to distribute to Gaia the tax effect of certain
tax loss carryforwards as utilized by the Company in preparing its federal, state and local income tax returns. At December 31,
2018, utilizing the new federal income tax rate of 21%, the Company estimates that the maximum amount of such distributions to
Gaia could aggregate $1.1 million.
15. Segment Information
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:
(in thousands)
|
|
2018
|
|
|
2017
|
|
Contract revenue:
|
|
|
|
|
|
|
|
|
Solar Division
|
|
|
12,703
|
|
|
|
15,586
|
|
POWERHOUSE™
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
25
|
|
|
|
6
|
|
Consolidated contract revenue
|
|
|
12,728
|
|
|
|
15,592
|
|
Operating loss from continuing operations:
|
|
|
|
|
|
|
|
|
Solar Division
|
|
|
(5,855
|
)
|
|
|
(8,729
|
)
|
POWERHOUSE™
|
|
|
(598
|
)
|
|
|
(20
|
)
|
Other
|
|
|
(8,518
|
)
|
|
|
(8,637
|
)
|
Operating Loss
|
|
|
(14,971
|
)
|
|
|
(17,386
|
)
|
Reconciliation of consolidated loss from operations to consolidated net loss:
|
|
|
|
|
|
|
|
|
Other income
|
|
|
1,063
|
|
|
|
68
|
|
Change in fair value of derivative liabilities and loss on debt extinguishment
|
|
|
(27,134
|
)
|
|
|
(379
|
)
|
Amortization of debt discount and deferred loan costs
|
|
|
(1,042
|
)
|
|
|
(3
|
)
|
Net loss
|
|
|
(42,084
|
)
|
|
|
(17,700
|
)
|
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)
|
|
2018
|
|
|
2017
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Solar Division
|
|
$
|
10,615
|
|
|
$
|
9,840
|
|
POWERHOUSE™
|
|
|
1,366
|
|
|
|
1,140
|
|
Other
|
|
|
4,279
|
|
|
|
3,278
|
|
|
|
$
|
16,260
|
|
|
$
|
14,258
|
|
16. Subsequent Events
On March 29, 2019, the Company announced an operational realignment
to exit its mainland residential solar business so as to focus on the POWERHOUSE™ in-roof shingle market. Revenues and net
loss in 2018 for the mainland residential solar business were approximately $8.9 million and $6.3 million, respectively.
On April 4, 2019, the Company closed a registered offering in
which it issued and sold (i) 15,938,280 shares of Class A common stock, (ii) prepaid Series S Warrants to purchase 1,430,141 shares
of Class A common stock and (iii) Series R Warrants to purchase 17,368,421 shares of Class A common stock pursuant to the terms
of the Securities Purchase Agreement dated April 2, 2019 between the Company and the investors. The investors paid $0.19 per share
of Class A common stock and $0.18 per share of Class A common stock underlying the Series S Warrant for aggregate gross proceeds
of $3.3 million at the closing and before $0.34 million of expenses.