|
Item 1.
|
Financial Statements
|
REAL GOODS SOLAR, INC.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share data)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,658
|
|
|
$
|
2,940
|
|
Restricted cash
|
|
|
—
|
|
|
|
173
|
|
Accounts receivable, net
|
|
|
2,477
|
|
|
|
3,002
|
|
Costs in excess of billings
|
|
|
92
|
|
|
|
19
|
|
Inventory, net
|
|
|
2,295
|
|
|
|
1,502
|
|
Deferred costs on uncompleted contracts
|
|
|
418
|
|
|
|
398
|
|
Other current assets
|
|
|
1,346
|
|
|
|
912
|
|
Current assets of discontinued operations
|
|
|
1,341
|
|
|
|
909
|
|
Total current assets
|
|
|
12,627
|
|
|
|
9,855
|
|
Property and equipment, net
|
|
|
997
|
|
|
|
620
|
|
POWERHOUSE™ license
|
|
|
1,064
|
|
|
|
—
|
|
Goodwill
|
|
|
1,338
|
|
|
|
1,338
|
|
Net investment in sales-type leases and other assets
|
|
|
1,457
|
|
|
|
1,308
|
|
Noncurrent assets of discontinued operations
|
|
|
592
|
|
|
|
1,252
|
|
Total assets
|
|
$
|
18,075
|
|
|
$
|
14,373
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
—
|
|
|
$
|
663
|
|
Convertible debt, net of deferred cost and pre-installment of $0 and $298
|
|
|
1
|
|
|
|
124
|
|
Accounts payable
|
|
|
991
|
|
|
|
2,019
|
|
Accrued license fee
|
|
|
1,000
|
|
|
|
—
|
|
Accrued liabilities
|
|
|
1,555
|
|
|
|
1,362
|
|
Billings in excess of costs on uncompleted contracts
|
|
|
—
|
|
|
|
107
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
46
|
|
Deferred revenue and other current liabilities
|
|
|
1,296
|
|
|
|
1,033
|
|
Current liabilities of discontinued operations
|
|
|
693
|
|
|
|
921
|
|
Total current liabilities
|
|
|
5,536
|
|
|
|
6,275
|
|
Other liabilities
|
|
|
2,231
|
|
|
|
2,222
|
|
Derivative liabilities
|
|
|
47
|
|
|
|
137
|
|
Noncurrent liabilities of discontinued operations
|
|
|
758
|
|
|
|
761
|
|
Total liabilities
|
|
|
8,572
|
|
|
|
9,395
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Class A common stock, $.0001 par value, 150,000,000 shares authorized, 7,480,906 and 1,183,151 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
8
|
|
|
|
8
|
|
Additional paid-in capital
|
|
|
204,765
|
|
|
|
187,752
|
|
Accumulated deficit
|
|
|
(195,270
|
)
|
|
|
(182,782
|
)
|
Total shareholders’ equity
|
|
|
9,503
|
|
|
|
4,978
|
|
Total liabilities and shareholders’ equity
|
|
$
|
18,075
|
|
|
$
|
14,373
|
|
See accompanying notes.
REAL GOODS SOLAR, INC.
Condensed Consolidated Statements of Operations (unaudited)
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
(in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Contract revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale and installation of solar energy systems
|
|
$
|
3,685
|
|
|
$
|
2,304
|
|
|
$
|
9,755
|
|
|
$
|
11,857
|
|
Service
|
|
|
320
|
|
|
|
159
|
|
|
|
888
|
|
|
|
429
|
|
Leasing, net
|
|
|
14
|
|
|
|
15
|
|
|
|
39
|
|
|
|
43
|
|
Contract expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installation of solar energy systems
|
|
|
3,466
|
|
|
|
2,077
|
|
|
|
9,210
|
|
|
|
10,769
|
|
Service
|
|
|
426
|
|
|
|
269
|
|
|
|
1,235
|
|
|
|
899
|
|
Customer acquisition
|
|
|
1,774
|
|
|
|
599
|
|
|
|
4,025
|
|
|
|
2,015
|
|
Contract loss
|
|
|
(1,647
|
)
|
|
|
(467
|
)
|
|
|
(3,788
|
)
|
|
|
(1,354
|
)
|
Operating expense
|
|
|
2,662
|
|
|
|
2,571
|
|
|
|
8,094
|
|
|
|
8,339
|
|
Litigation expense
|
|
|
77
|
|
|
|
—
|
|
|
|
212
|
|
|
|
24
|
|
Operating loss
|
|
|
(4,386
|
)
|
|
|
(3,038
|
)
|
|
|
(12,094
|
)
|
|
|
(9,717
|
)
|
Interest expense
|
|
|
—
|
|
|
|
(1,330
|
)
|
|
|
—
|
|
|
|
(2,253
|
)
|
Taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27
|
)
|
Derivative and other
|
|
|
19
|
|
|
|
(535
|
)
|
|
|
135
|
|
|
|
(251
|
)
|
Debt accretion expense and loss on extinguishment
|
|
|
—
|
|
|
|
(2,831
|
)
|
|
|
(486
|
)
|
|
|
(2,831
|
)
|
Loss from continuing operations, net of tax
|
|
|
(4,367
|
)
|
|
|
(7,734
|
)
|
|
|
(12,445
|
)
|
|
|
(15,079
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
(55
|
)
|
|
|
(1
|
)
|
|
|
(43
|
)
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,422
|
)
|
|
$
|
(7,735
|
)
|
|
$
|
(12,488
|
)
|
|
$
|
(14,849
|
)
|
Net loss per share – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.58
|
)
|
|
$
|
(308.10
|
)
|
|
$
|
(1.89
|
)
|
|
$
|
(673.20
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
10.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.59
|
)
|
|
$
|
(308.10
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
(663.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,481
|
|
|
|
25
|
|
|
|
6,567
|
|
|
|
22
|
|
See accompanying notes.
REAL GOODS SOLAR, INC.
Condensed Consolidated Statement of Changes in Shareholders’
Equity (unaudited)
|
|
Class A Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total
Shareholders’
|
|
(in thousands, except share data)
|
|
Shares
|
|
|
Amount
|
|
|
Paid - in Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balances, January 1, 2017
|
|
|
1,183,151
|
|
|
$
|
8
|
|
|
$
|
187,752
|
|
|
$
|
(182,782
|
)
|
|
$
|
4,978
|
|
Issuance of common stock and other equity changes related to compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
249
|
|
|
|
—
|
|
|
|
249
|
|
Proceeds from common stock offering, net of costs
|
|
|
6,110,000
|
|
|
|
—
|
|
|
|
16,029
|
|
|
|
—
|
|
|
|
16,029
|
|
Fair value of shares issued for convertible notes and interest
|
|
|
177,018
|
|
|
|
|
|
|
|
735
|
|
|
|
|
|
|
|
735
|
|
Fractional shares issued in connection with reverse split
|
|
|
10,737
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,488
|
)
|
|
|
(12,488
|
)
|
Balances, September 30, 2017
|
|
|
7,480,906
|
|
|
$
|
8
|
|
|
$
|
204,765
|
|
|
$
|
(195,270
|
)
|
|
$
|
9,503
|
|
See accompanying notes.
REAL GOODS SOLAR, INC.
Condensed Consolidated Statements of Cash Flows (unaudited)
|
|
For the Nine Months Ended
September 30,
|
|
(in thousands except share data)
|
|
2017
|
|
|
2016
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,488
|
)
|
|
$
|
(14,849
|
)
|
Gain (loss) from discontinued operations
|
|
|
(43
|
)
|
|
|
230
|
|
Loss from continuing operations
|
|
|
(12,445
|
)
|
|
|
(15,079
|
)
|
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities – continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
303
|
|
|
|
316
|
|
Amortization of debt discount and issuance costs
|
|
|
—
|
|
|
|
1,669
|
|
Share-based compensation expense
|
|
|
249
|
|
|
|
517
|
|
Debt accretion expense and loss on extinguishment
|
|
|
486
|
|
|
|
2,831
|
|
Change in valuation of derivative liabilities
|
|
|
(135
|
)
|
|
|
268
|
|
Loss on sale of assets
|
|
|
—
|
|
|
|
10
|
|
Bad debt expense
|
|
|
54
|
|
|
|
111
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
471
|
|
|
|
1,692
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
(73
|
)
|
|
|
706
|
|
Inventory, net
|
|
|
(793
|
)
|
|
|
667
|
|
Deferred costs on uncompleted contracts
|
|
|
(20
|
)
|
|
|
347
|
|
Net investment in sales-type leases and other assets
|
|
|
(149
|
)
|
|
|
(167
|
)
|
Other current assets
|
|
|
(434
|
)
|
|
|
(201
|
)
|
Accounts payable
|
|
|
(1,028
|
)
|
|
|
(186
|
)
|
Accrued liabilities
|
|
|
318
|
|
|
|
(92
|
)
|
Billings in excess of costs on uncompleted contracts
|
|
|
(107
|
)
|
|
|
(619
|
)
|
Deferred revenue and other current liabilities
|
|
|
263
|
|
|
|
654
|
|
Other liabilities
|
|
|
9
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities – continuing operations
|
|
|
(13,031
|
)
|
|
|
(6,608
|
)
|
Net cash (used in) provided by operating activities – discontinued operations
|
|
|
(46
|
)
|
|
|
101
|
|
Net cash used in operating activities
|
|
|
(13,077
|
)
|
|
|
(6,507
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Payments related to POWERHOUSE™ license
|
|
|
(64
|
)
|
|
|
—
|
|
Purchase of property and equipment
|
|
|
(680
|
)
|
|
|
—
|
|
Proceeds from sale of property and equipment
|
|
|
—
|
|
|
|
10
|
|
Net cash (used in) provided by investing activities
|
|
|
(744
|
)
|
|
|
10
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from warrant exercises, net of costs
|
|
|
—
|
|
|
|
1,586
|
|
Proceeds from convertible debt, net of costs and restricted cash
|
|
|
—
|
|
|
|
1,533
|
|
Restricted cash released upon conversion of debt
|
|
|
173
|
|
|
|
—
|
|
Proceeds from the issuance of common stock, net of costs
|
|
|
16,029
|
|
|
|
2,242
|
|
Principal payments on revolving line of credit
|
|
|
(663
|
)
|
|
|
(13,323
|
)
|
Principal borrowings on revolving line of credit
|
|
|
—
|
|
|
|
15,243
|
|
Net cash provided by financing activities
|
|
|
15,539
|
|
|
|
7,281
|
|
Net change in cash
|
|
|
1,718
|
|
|
|
784
|
|
Cash and cash equivalents at beginning of period
|
|
|
2,940
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,658
|
|
|
$
|
1,378
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
8
|
|
|
$
|
161
|
|
Non-cash items
|
|
|
|
|
|
|
|
|
Convertible notes interest paid with common stock
|
|
$
|
125
|
|
|
$
|
—
|
|
Initial up-front POWERHOUSE™ license fee
|
|
$
|
1,000
|
|
|
$
|
—
|
|
Transfer from accounts payable to other liabilities for amounts paid by insurance carrier
|
|
$
|
—
|
|
|
$
|
1,510
|
|
Transfer of accounts payable to vendor line of credit
|
|
$
|
—
|
|
|
$
|
1,071
|
|
Change in common stock warrant liability in conjunction with exercise/extinguishment of warrants
|
|
$
|
—
|
|
|
$
|
103
|
|
Payment on line of credit in Class A common stock
|
|
$
|
—
|
|
|
$
|
167
|
|
Discount from warrants issued in conjunction with 2016 Note Offering
|
|
$
|
—
|
|
|
$
|
2,500
|
|
Accrued closing costs on Convertible notes
|
|
$
|
—
|
|
|
$
|
651
|
|
Embedded derivative liability recorded in conjunction with April 2016 Offering
|
|
$
|
—
|
|
|
$
|
2,616
|
|
See accompanying notes.
Notes to Condensed Consolidated Financial Statements
1. Organization, Nature of Operations, and Principles of Consolidation
Real Goods Solar, Inc. (the “Company” or
“RGS”) is a residential and small business commercial solar energy engineering, procurement, and construction firm.
The Company is also the exclusive manufacturer of POWERHOUSE™, an innovative in-roof solar shingle based on technology developed
by The Dow Chemical Company.
Principles of Consolidation
We have prepared our unaudited interim condensed consolidated
financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) have been condensed or omitted pursuant to these rules and regulations, although we
believe that the disclosures made are adequate to make the information not misleading. In our opinion, the unaudited interim financial
statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material
respects, our condensed consolidated financial position as of September 30, 2017, the interim results of operations for the three
and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016. These
interim statements have not been audited. The balance sheet as of December 31, 2016, was derived from our audited consolidated
financial statements included in our annual report on Form 10-K. The interim condensed consolidated financial statements contained
herein should be read in conjunction with our audited financial statements, including the notes thereto, for the year ended December
31, 2016.
Discontinued Operations
During 2014, we committed to a plan to sell certain contracts
and rights comprising our large commercial installations business, otherwise known as our former Commercial segment. At the same
time, we determined not to enter into further large commercial installation contracts in the mainland United States. Most contracts
in process at December 31, 2014 were substantially completed during 2015 and remaining work was completed during 2016. We
report this business as a discontinued operation, separate from our continuing operations. See Note 10. Discontinued Operations.
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 Global Technologies LLC (“Dow”) for its 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 is being developed with traditional silicon solar cells
to increase solar production and to provide a competitive consumer price point. 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, a requirement
the Company believes is achievable.
In addition to the License, the Company and Dow executed a Trademark
License Agreement (the “TLA”), a Technology Service Agreement (the “TSA”) and a Sales Agreement-Surplus
Property (the “Sales Agreement”). The execution of the TLA will allow RGS to market the POWERHOUSE™ 3.0 product
using the Dow name. The Sales Agreement identified used manufacturing molds that Dow transferred title to RGS for a cost of $1.
Under the terms of the License, the Company will produce, market
and sell POWERHOUSE™ 3.0, for which it has agreed to a license fee of $3 million and a running royalty fee equal to 2.5%
against net sales of the POWERHOUSE™ product and services, payable quarterly in arrears. Further, the Company will be responsible
for all post-Effective Date costs to obtain United Laboratories certification (“UL Certification”) and for the prosecution
of all related patents world-wide, which may be offset against the payment of the running royalty fee. The license fee will be
paid in two payments consisting of $1 million due within 10 days of the Effective Date of the License and the remaining $2 million
due within 30 days of the Company receiving UL Certification of the POWERHOUSE™ 3.0 product. Upon obtaining UL Certification,
the Company intends to begin commercialization of POWERHOUSE™ 3.0 entailing the manufacturing, marketing and sale of POWERHOUSE™
3.0 to roofing companies.
Liquidity and Financial Resources Update
The Company experienced recurring operating losses and negative
cash flow from operations in recent years. Starting with the fourth quarter of 2014, measures were implemented to reduce cash outflow
for operations such that the required level of sales to achieve break-even results was reduced. These measures included (i) exiting
the large commercial segment which was operating at both an operating and cash flow loss, (ii) reducing staffing levels, (iii)
physically exiting the California market where its costs to operate were high, (iv) focusing on cash sales to customers and not
leasing to customers, (v) negotiating lower costs for equipment, and (vi) an operating initiative designed to improve profitability
such as reducing the length of cycle time for customer installations and lowering the cost of marketing.
The Company’s historical operating losses have required the
Company to raise financial capital. During the fourth quarter of 2016, the Company raised $16.1 million, net of costs, and the
Company raised an additional $16.0 million, net of costs during the first quarter of 2017. See Note 5, Shareholders’ Equity.
The Company used a portion of the proceeds from the financial capital raised to reduce accounts payable, purchase materials to
convert backlog to revenue and begin to execute our revenue growth strategy.
Prior to obtaining the exclusive POWERHOUSE™ license, we had
estimated that to operate profitably we would require approximately $16 million in quarterly revenue. Current quarterly revenue
is materially less than this amount and, accordingly, to be successful in increasing sales and resultant revenue, the Company is
in the process of implementing a revenue growth strategy which includes the following components:
|
·
|
Expand the size of the Company’s call center sales organization;
|
|
·
|
Expand the size of the Company’s field sales teams on the east coast and Sunetric, small business
commercial sales team, and construction organizations;
|
|
·
|
Expand the digital marketing program, and increase spending to generate
greater customer leads while achieving desired cost of customer acquisition;
|
|
·
|
Make available to the Company’s customers additional third-party
providers to finance customer acquisitions of our solar energy systems;
|
|
·
|
Expand the Company’s network of authorized third-party installers;
|
|
·
|
Invest in the POWERHOUSE™ license by obtaining
UL Certification for POWERHOUSE™ 3.0, a prerequisite for commercialization of the product and, upon achieving UL Certification,
manufacture, market and sell POWERHOUSE™ 3.0 to roofing companies; and
|
|
·
|
Invest in innovation for future sales and profitability, such as customer-centric
software, new products and services such as the sale of energy storage and energy audit services to attract new customers.
|
The Company has prepared its business plan for the ensuing
12 months, and believes it has sufficient financial resources to operate for the ensuing 12-month period. The plan anticipates
(i) that because accounts payable at September 30, 2017 has been reduced to only $991,000, future expenditures will predominantly
be used for producing customer installation revenue, as opposed to paying down previously outstanding accounts payable, and (ii)
an increase in installation contract income from implementation of the revenue growth strategy. Until the Company is successful
in implementing its plans to increase revenue to the level required to break-even, the Company expects to have cash outflow from
operating activities. In addition, the Company expects to have cash outflow from operating activities for the remainder of the
year, as cash is utilized to increase revenue by (i) funding an anticipated level of rooftop installations for customers, (ii)
expanding e-sales and field sales organizations and (iii) increasing marketing spend for lead generation. Future commercialization
of POWERHOUSE™ 3.0 will require financial capital that the Company plans to satisfy with a combination of (i) available
cash, (ii) cash from common stock warrant exercises, (iii) draws from an asset based lending facility the company will seek to
secure in the future, and (iv) new equity issuances.
During October 2017, certain holders of
warrants provided notices to the Company to exercise warrants to purchase 674,096 shares of our Class A common stock, resulting
in net proceeds of $1.1 million. As of the end of October 2017, there remain outstanding warrants to purchase a total of 5,853,861
shares of Class A common stock. The funds from the October 2017 warrant exercises were used to pay the initial Dow License fee
payment of $1 million made by the Company on October 6, 2017.
2. Significant Accounting Policies
The Company made no changes to its significant accounting policies
during the nine months ended September 30, 2017.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company’s management in accordance with GAAP for interim financial information and in compliance
with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, these unaudited consolidated financial
statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion
of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have
been included. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the expected
results for the year ending December 31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2016. Intercompany balances and transactions have been eliminated.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency
with the current period presentation. These reclassifications had no effect on the reported results of operations. During the second
quarter of 2017, the Company concluded that it was appropriate to classify items in the statement of operations to conform with
operating metrics reported to investors and the manner in which management evaluates financial performance and to classify warranty
liability separately as current and non-current liabilities. Accordingly, the Company revised the classification of certain items
to report items in the statement of operations and balance sheet. These changes in classification did not change the previously
reported operating income (loss) in the statement of operations, or cash generated (used) from operations in the statement of cash
flows, or operating income (loss) for any business segment.
Service Revenue and Expense and Warranties
The Company recognizes service revenue when service work is completed
for customers and third-party owners of solar energy systems, and collection of receivables is reasonably assured. Concurrent with
the recognition of revenue the costs of such services are reflected as service expense.
The Company warrants solar energy systems sold to customers for
up to ten years against defects in installation workmanship. The manufacturers’ warranties on the solar energy system components,
which are passed through to the customers, typically have product warranty periods of 10 years and a limited performance warranty
period of up to 25 years. The Company provides for the estimated cost of warranties at the time the related revenue is recognized.
This estimated future costs for the limited warranty is recorded as contract expenses on installation of solar energy systems.
The Company also maintains specific warranty liabilities for large commercial customers included in discontinued operations. The
Company assesses the accrued warranty reserve regularly and adjusts the amounts as necessary based on actual experience and changes
in future estimates. This variance between the previously estimated warranty at the time of installation of the solar energy system
and actual experience rate is recorded as service expense.
POWERHOUSE™ License
Up-front license payments when incurred, costs to obtain UL Certification
and legal costs to acquire the license and protect the underlying patents are initially capitalized and thereafter amortized to
operations, upon achieving UL Certification, on a straight line basis over the expected life of the license through 2034.
Recently Issued Accounting Standards
ASU 2017-04
On January 26, 2017, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”),
Intangibles – Goodwill and Other (Topic 350):
Simplifying the Accounting for Goodwill Impairment
, which was issued to simplify the accounting for goodwill impairment. This
ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Impairment will now
be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
All other goodwill impairment guidance remains largely unchanged. The standard is effective for financial statements issued for
fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed
after January 1, 2017, and the Company is assessing the impact of ASU 2017-04 on its consolidated financial statements.
ASU 2016-20
On December 21, 2016, the FASB issued Accounting Standards Update
No. 2016-20 (“ASU 2016-20”),
Technical Corrections and Improvements to Topic 606
,
Revenue from Contracts
with Customers
. This ASU provides technical corrections and improvements to Topic 606. This ASU is effective for the Company
on January 1, 2018, which coincides with the effective date of ASU 2014-09 (as defined below). The Company expects the adoption
of ASU 2016-20 will have minimal impact on its consolidated financial statements.
ASU 2016-18
On November 17, 2016, the FASB issued Accounting
Standards Update No. 2016-18 (“ASU 2016-18”),
Statement of Cash Flows: Restricted Cash,
which was issued to
address the diversity that currently exists in the classification and presentation of changes in restricted cash on the statement
of cash flows. This
ASU
requires that a statement of cash flows explain the change
during the period in the total of cash, cash equivalents, and amounts general described as restricted cash and restricted cash
equivalents. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and
interim periods therein. Early adoption is permitted and the Company is assessing the impact of ASU 2016-18 on its consolidated
statements of cash flows.
ASU 2016-15
On August 26, 2016, the FASB issued Accounting Standards Update
No. 2016-15 (“ASU 2016-15”),
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments,
which was issued to provide clarification on how certain cash receipts and cash payments are reported in the statement of cash
flows. This
ASU
addresses eight specific cash flow issues in an effort to reduce
existing diversity between companies. The standard is effective for financial statements issued for fiscal years beginning after
December 15, 2017, and interim periods therein. Early adoption is permitted and the Company is assessing the impact of ASU 2016-15
on its consolidated statements of cash flows.
ASU 2016-02
On February 25, 2016, the FASB issued Accounting Standards Update
No. 2016-02 (“ASU 2016-02”),
Leases (Topic 842),
which sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees
to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the
lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also
required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of
their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating
leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing
guidance for sales-type leases, direct financing leases and operating leases. The standard is effective for financial statements
issued for fiscal years beginning after December 15, 2018, and interim periods therein. The Company currently expects that upon
adoption of ASU 2016-02, right-of-use assets and lease liabilities will be recognized on the balance sheet in amounts that will
be material.
ASU 2014-09
On May 28, 2014, the FASB issued Accounting Standards Update
No. 2014-09 (“ASU 2014-09”), which created Topic 606,
Revenue from Contracts with Customers
. This
standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue
model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has
the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer
of risks and rewards, as it is considered in current guidance.
In August 2015, the FASB issued Accounting Standards Update No.
2015-14,
Revenue from Contracts with Customers – Deferral of the Effective Date
, which defers the effective date of
ASU 2014-09 one year. ASU 2014-09, as deferred by ASU 2015-14, will be effective for the first interim period within annual reporting
periods beginning after December 15, 2017. The two permitted transition methods under the new standard are the full retrospective
method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying
the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative
effect of applying the standard would be recognized at the date of initial application.
During the second and third quarters of 2017, we evaluated our contracts
with customers and have determined that for the majority of our contracts there will not be any significant change to timing or
method of recognizing revenue. As such, we do not believe this new standard will have a material impact on our results of operations,
financial condition or cash flows. The Company will adopt the new standard as of January 1, 2018, and utilize the modified retrospective
method which will require a disclosure of the nature of and reason for the change in accounting principle. In the year of adoption,
the Company must also disclose the amount by which each financial statement line item is affected in the current year as a result
of applying the revenue standard and a qualitative explanation of the significant changes between the reported results under the
revenue standard and the previous revenue guidance.
3. Line of Credit
On February 9, 2017, the Company terminated its line of credit with
Solar Solutions and Distribution, LLC (“Solar Solutions”). Additionally, the Company had an exclusive supply agreement
with Solar Solutions which was coterminous with the line of credit, and accordingly, that was terminated as of the same date. As
of September 30, 2017, the Company does not have a line of credit facility.
4. Commitments and Contingencies
The Company leases office and warehouse space through operating
leases. Some of the leases have renewal clauses, which range from one month to five years.
The Company leases vehicles for certain field personnel and accounts
for these vehicles as operating leases. During the three months ended September 30, 2017, the Company executed a master lease agreement
that replaces a significant number of its existing fleet of vehicles. Substantially all vehicles under the master lease agreement
have been received by the Company as of September 30, 2017. The lease term is four years with varying terminating dates through
September 2021.
The following schedule represents the annual future minimum payments
of all leases as of September 30, 2017:
(in thousands)
|
|
Future Minimum
Lease Payments
|
|
2017
|
|
$
|
250
|
|
2018
|
|
|
638
|
|
2019
|
|
|
560
|
|
2020
|
|
|
506
|
|
2021
|
|
|
435
|
|
2022 and thereafter
|
|
|
112
|
|
Total minimum lease payments
|
|
$
|
2,501
|
|
The Company incurred office and warehouse rent expense of $0.2 and
$0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.5 and $0.5 million for the nine months
ended September 30, 2017 and 2016, respectively.
The Company is subject to risks and uncertainties in the normal
course of business, including legal proceedings; governmental regulation, such as the interpretation of tax and labor laws; and
the seasonal nature of its business due to weather-related factors. The Company has accrued for probable and estimable costs incurred
with respect to identified risks and uncertainties based upon the facts and circumstances currently available.
As previously disclosed in the Company’s Quarterly Report
on Form 10-Q for the first quarter of 2017, on February 16, 2017, Alpha Capital Anstalt (“Alpha”), an investor in the
Company’s February 7, 2017 public offering of common stock and warrants, filed a lawsuit against Roth Capital Partners, LLC,
the Company’s investment banking firm in the offering, and the Company in U.S. District Court for the Southern District of
New York. Alpha’s lawsuit alleges that the registration statement for the February 7, 2017 offering contained material misstatements
or omissions and that the Company had breached contractual obligations owed to Alpha. Alpha seeks unspecified monetary damages,
rescission and other unspecified relief in the lawsuit. The Company disputes Alpha’s allegations and intends to vigorously
defend itself in the lawsuit. Under local court rules, the Company filed a letter motion seeking permission to file a motion
to dismiss the claims related to the alleged misstatements and omissions in the complaint. On May 12, 2017, Alpha filed an amended
complaint removing the fraud-related claims and leaving only breach of contract claims against the Company.
On September 29, 2017, Dow awarded the Company a world-wide
exclusive license for the POWERHOUSE™ in-roof solar shingle. Under terms of the License, RGS has agreed to a license
fee of $3 million, of which $1 million is payable within 10 days of the Effective Date of the License Agreement and the
remaining $2 million will become a liability in the future upon obtaining UL Certification and payable within 30 days of the
Company receiving UL Certification of the POWERHOUSE™ 3.0 product. Subsequent to quarter end, on October 6, 2017, the
Company made the initial payment of $1 million to Dow which has been recorded as an intangible asset as of September 30,
2017, on the Condensed Consolidated Balance Sheet..
5. Shareholders’ Equity
The following transactions were completed
during the nine months ended September 30, 2017:
January 2017 Reverse Stock Split
On January 25, 2017, the Company executed
a reverse stock split of all outstanding shares of the Company’s Class A common stock at a ratio of one-for-thirty,
whereby thirty shares of Class A common stock were combined into one share of Class A common stock. The reverse split
was previously authorized by a vote of the Company’s shareholders on January 23, 2017. The Company did not decrease its authorized
shares of capital stock in connection with the reverse stock split. Share amounts are presented to reflect the reverse split for
all periods.
February 2017 Offerings
On February 6, 2017, the Company closed
a $11.5 million offering and sale of (a) units, “February 6 Primary Units,” each consisting of one share of the Company’s
Class A common stock, and a Series K warrant to purchase one share of Class A common stock, and (b) units, “February 6 Alternative
Units,” each consisting of a prepaid Series L warrant to purchase one share of Common Stock, and a Series K warrant pursuant
to the Securities Purchase Agreement, dated as of February 1, 2017, by and among the Company and several institutional investors,
and to public retail investors. As a result, the Company issued 2,096,920 February 6 Primary Units, 1,613,080 February 6 Alternative
Units, 2,096,920 shares of Class A common stock as part of the February 6 Primary Units, Series K warrants to purchase 3,710,000
shares of Class A common stock, and Series L warrants to purchase 1,613,080 shares of Class A common stock. The purchase price
for a February 6 Primary Unit was $3.10 and the purchase price for a February 6 Alternative Unit was $3.09. The Company received
net proceeds of approximately $10.5 million at the closing, after deducting commissions to the placement agents and estimated offering
expenses payable by the Company associated with the offering. As of September 30, 2017, there were 3,710,000 Series K warrants
outstanding.
On February 9, 2017, the Company closed
a $6 million offering and sale of (a) units, “February 9 Primary Units,” each consisting of one share of the Company’s
Class A common stock, and a Series M warrant to purchase 75% of one share of Class A common stock, and (b) units, “February
9 Alternative Units,” each consisting of a prepaid Series N warrant to purchase one share of Class A common stock, and a
Series M warrant, pursuant to the Securities Purchase Agreement, dated as of February 7, 2017, by and among the Company and several
institutional and accredited investors. As a result, the Company issued 1,650,000 February 9 Primary Units, 750,000 February 9
Alternative Units, 1,650,000 shares of Class A common stock as part of the February 9 Primary Units, Series M warrants to purchase
1,800,000 shares of Class A common stock, and Series N warrants to purchase 750,000 shares of Class A common stock. The purchase
price for a February 9 Primary Unit was $2.50 and the purchase price for a February 9 Alternative Unit was $2.49. The Company received
net proceeds of approximately $5.5 million at the closing, after deducting commissions to the placement agents and estimated offering
expenses payable by the Company associated with the offering. As of September 30, 2017, there were 1,800,000 Series M warrants
outstanding.
Option and Warrant Exercises
During the three and nine months ended September 30, 2017 and 2016,
the Company issued no shares of its Class A common stock to employees upon the exercise of stock options. During the nine
months ended September 30, 2017 and 2016 the Company issued zero and 9,584 shares of its Class A common stock pursuant to the exercise
of warrants, respectively.
At September 30, 2017, the Company had the following shares of Class A
common stock reserved for future issuance:
Stock options and grants outstanding under incentive plans
|
|
|
172
|
|
Common stock warrants outstanding - derivative liability
|
|
|
43,015
|
|
Common stock warrants outstanding - equity security
|
|
|
6,484,942
|
|
Total shares reserved for future issuance
|
|
|
6,528,129
|
|
6. Fair Value Measurements
The following tables summarize the basis used to measure certain
financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:
Balance at September 30, 2017 (in thousands)
|
|
Total
|
|
|
Quoted Prices
in Active
Markets for
Identical
Items
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Common stock warrant liability
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47
|
|
For the Company’s Level 3 measures, which represent common
stock warrants, fair value is based on a Monte Carlo pricing model that is based, in part, upon unobservable inputs for which there
is little or no market data, requiring the Company to develop its own assumptions. The Company used a market approach to value
these derivative liabilities.
The following table shows the reconciliation from the beginning
to the ending balance for the Company’s common stock warrant liability and embedded derivative liability measured at fair
value on a recurring basis using significant unobservable inputs (i.e. Level 3) for the period ended September 30, 2017:
(in thousands)
|
|
Common stock
warrant liability
|
|
|
Embedded
derivative
liability
|
|
|
Total
|
|
Fair value of derivative liabilities at December 31, 2016
|
|
$
|
137
|
|
|
$
|
46
|
|
|
$
|
183
|
|
Change in the fair value of derivative liabilities, net
|
|
|
(90
|
)
|
|
|
-
|
|
|
|
(90
|
)
|
Adjustments for conversions of Notes
|
|
|
-
|
|
|
|
(46
|
)
|
|
|
(46
|
)
|
Fair value of derivative liabilities at September 30, 2017
|
|
$
|
47
|
|
|
|
-
|
|
|
$
|
47
|
|
7. Share-Based Compensation
During the nine months ended September 30, 2017, under its 2008
Long-Term Incentive Plan, as amended, the Company did not grant any stock options and cancelled 2 stock options versus zero grants
of stock options and cancellations of 34 stock options during the nine months ended September 30, 2016. Substantially all stock
options vest at 2% per month for the 50 months beginning with the first day of the eleventh month after date of grant.
Total share-based compensation expense recognized was $0.02 million
and $0.2 million during the three months ended September 30, 2017 and 2016, respectively, and $0.2 million and $0.5 million during
the nine months ended September 30, 2017 and 2016, respectively.
8. Net Income (Loss) Per Share
Basic net income (loss) per share excludes any dilutive effects
of options, warrants or the Senior Secured Convertible Notes due April 1, 2019. The Company computes basic net income (loss) per
share using the weighted average number of shares of its Class A common stock outstanding during the period. The Company
computes diluted net income (loss) per share using the weighted average number of shares of its Class A common stock and
common stock equivalents outstanding during the period. The Company excluded common stock equivalents of 6.5 million and 217,000
for the nine months ended September 30, 2017 and 2016, respectively, from the computation of diluted net loss per share because
their effect was antidilutive.
9. Segment Information
As of September 30, 2017, the Company operates as four reportable
segments: (1) Residential – the installation of solar energy systems for homeowners, including lease financing thereof,
and small business commercial in the continental United States; (2) Sunetric – the installation of solar energy systems
for both homeowners and business owners (commercial) in Hawaii; (3) POWERHOUSE™ – the manufacturing and sale of solar
shingles; and (4) Other – corporate operations. The Company discontinued its former large commercial segment and it
is presented as discontinued operations.
Financial information for the Company’s segments and a reconciliation
of the total of the reportable segments’ loss from operations to the Company’s consolidated net loss are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Contract revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
3,101
|
|
|
$
|
1,442
|
|
|
$
|
9,220
|
|
|
$
|
8,475
|
|
Sunetric
|
|
|
918
|
|
|
|
1,036
|
|
|
|
1,462
|
|
|
|
3,811
|
|
POWERHOUSE™
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consolidated contract revenue
|
|
|
4,019
|
|
|
|
2,478
|
|
|
|
10,682
|
|
|
|
12,286
|
|
Loss from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
(1,843
|
)
|
|
|
(1,399
|
)
|
|
|
(4,095
|
)
|
|
|
(3,556
|
)
|
Sunetric
|
|
|
(847
|
)
|
|
|
(100
|
)
|
|
|
(2,182
|
)
|
|
|
(1,189
|
)
|
POWERHOUSE™
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(1,696
|
)
|
|
|
(1,539
|
)
|
|
|
(5,817
|
)
|
|
|
(4,972
|
)
|
Operating loss
|
|
|
(4,386
|
)
|
|
|
(3,038
|
)
|
|
|
(12,094
|
)
|
|
|
(9,717
|
)
|
Reconciliation of operating loss to consolidated net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(1,330
|
)
|
|
|
—
|
|
|
|
(2,253
|
)
|
Derivative and other
|
|
|
19
|
|
|
|
(535
|
)
|
|
|
135
|
|
|
|
(251
|
)
|
Debt accretion expense and loss on extinguishment
|
|
|
—
|
|
|
|
(2,831
|
)
|
|
|
(486
|
)
|
|
|
(2,831
|
)
|
Income tax (expense) benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
(55
|
)
|
|
|
(1
|
)
|
|
|
(43
|
)
|
|
|
230
|
|
Net loss
|
|
$
|
(4,422
|
)
|
|
$
|
(7,735
|
)
|
|
$
|
(12,488
|
)
|
|
$
|
(14,849
|
)
|
The following is a reconciliation of reportable segments’
assets to the Company’s consolidated total assets. The Other segment includes certain unallocated corporate amounts.
(in thousands)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Total assets – continuing operations:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
10,494
|
|
|
$
|
7,159
|
|
Sunetric
|
|
|
1,731
|
|
|
|
1,196
|
|
POWERHOUSE™
|
|
|
1,064
|
|
|
|
—
|
|
Other
|
|
|
2,853
|
|
|
|
3,857
|
|
|
|
$
|
16,142
|
|
|
$
|
12,212
|
|
Total assets – discontinued operations:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,933
|
|
|
|
2,161
|
|
|
|
$
|
18,075
|
|
|
$
|
14,373
|
|
10. Discontinued Operations
The following is a reconciliation of the major line items constituting
pretax income of discontinued operations to the after-tax income (loss) on discontinued operations that are presented in the condensed
consolidated statements of operations as indicated:
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Major line items constituting pretax gain (loss) of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
4
|
|
|
$
|
59
|
|
|
$
|
8
|
|
|
$
|
405
|
|
Contract (income) expense
|
|
|
(36
|
)
|
|
|
17
|
|
|
|
(37
|
)
|
|
|
47
|
|
Operating and other expense
|
|
|
95
|
|
|
|
43
|
|
|
|
88
|
|
|
|
128
|
|
Pretax income (loss) from discontinued operations
|
|
|
(55
|
)
|
|
|
(1
|
)
|
|
|
(43
|
)
|
|
|
230
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(55
|
)
|
|
$
|
(1
|
)
|
|
$
|
(43
|
)
|
|
$
|
230
|
|
The following is a reconciliation of the carrying amounts of major
classes of assets and liabilities of the discontinued operations to the total assets and liabilities of the discontinued operations
presented separately in the condensed consolidated balance sheets as indicated:
(in thousands)
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of assets included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
494
|
|
|
$
|
536
|
|
Costs in excess of billings on uncompleted contracts
|
|
|
62
|
|
|
|
207
|
|
Inventory, net
|
|
|
59
|
|
|
|
37
|
|
Surety bond deposit
|
|
|
624
|
|
|
|
—
|
|
Other current assets
|
|
|
102
|
|
|
|
129
|
|
Total major classes of current assets of the discontinued operations
|
|
|
1,341
|
|
|
|
909
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
592
|
|
|
|
1,252
|
|
Total noncurrent assets of discontinued operations
|
|
|
592
|
|
|
|
1,252
|
|
Total assets of the discontinued operations in the balance sheet
|
|
$
|
1,933
|
|
|
$
|
2,161
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities included as part of discontinued operations:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
270
|
|
|
$
|
285
|
|
Accrued liabilities
|
|
|
310
|
|
|
|
523
|
|
Deferred revenue and other current liabilities
|
|
|
113
|
|
|
|
113
|
|
Total current liabilities of discontinued operations
|
|
|
693
|
|
|
|
921
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
758
|
|
|
|
761
|
|
Total major classes of noncurrent liabilities of the discontinued operations
|
|
|
758
|
|
|
|
761
|
|
Total liabilities of the discontinued operations in the balance sheet
|
|
$
|
1,451
|
|
|
$
|
1,682
|
|
11. Subsequent Events
During October 2017, the Company received exercise notices from
warrant holders to exercise warrants for 669,117 shares of Class A common stock of the Company resulting in net proceeds of $1.1
million to the Company. Additionally, the Company issued 1,822 shares of Class A common stock upon the cashless exercise of Series
G Warrants exercisable into 4,979 shares of Class A common stock, pursuant to the terms of the Series G Warrant because the underlying
Class A Common Stock was not registered on a registration statement.
The Company has evaluated events up to the filing date of these
interim financial statements and determined that, other than what has been disclosed above, no further subsequent event activity
required disclosure.
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis provides information that
we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read
this analysis in conjunction with our interim condensed consolidated financial statements and related footnotes. This discussion
and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These
statements involve known and unknown risks, uncertainties and other factors that may cause actual results, level of activity, performance
or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements, including those set forth in our Form 10-K for the year ended December 31, 2016 and
in this Quarterly Report for the period ended September 30, 2017.
Discontinued Operations
During 2014, we committed to a plan to sell certain contracts and
rights comprising our large commercial installations business, otherwise known as our former Commercial segment. At the same time,
we determined not to enter into further large commercial installation contracts in the mainland United States. Most contracts in
process at December 31, 2014 were substantially completed during 2015 and remaining work was completed in 2016. We now report
this business as a discontinued operation, separate from our continuing operations. The following management discussion and analysis
of financial condition and results of operations is for our continuing operations, unless indicated otherwise.
Overview
We are a residential and small business commercial solar energy
engineering, procurement and construction firm. We offer turnkey services, including design, procurement, permitting, build-out,
grid connection, financing referrals and warranty and customer satisfaction activities. Our solar energy systems use high-quality
solar photovoltaic modules. We use proven technologies and techniques to help customers achieve meaningful savings by reducing
their utility costs. In addition, we help customers lower their reliance upon fossil fuel energy sources. As of September 29, 2017,
we are the exclusive domestic and international licensee of POWERHOUSE™ in-roof solar shingle, an innovative and aesthetically
pleasing solar shingle system developed by Dow.
We, including our predecessors, have more than 39 years of experience
in residential solar energy and trace our roots to 1978, when Real Goods Trading Corporation sold the first solar photovoltaic
panels in the United States. We have designed and installed over 25,000 residential and commercial solar energy systems since our
founding.
During 2014, we discontinued our entire former Commercial segment
and sold the assets associated with our catalog business (a portion of the Other segment). As of September 30, 2017, we created
a new segment for our POWERHOUSE™ business. As a result, we now operate as four reportable segments: (1) Residential
– the installation of solar energy systems for homeowners, including lease financing thereof, and small business commercial
in the continental United States; (2) Sunetric – the installation of solar energy systems for both homeowners and business
owners (commercial) in Hawaii; (3) POWERHOUSE™ - the manufacturing and sales of solar shingles; and (4) Other –
corporate operations. We believe this structure enables us to more effectively manage our operations and resources.
We have experienced recurring operating losses and negative cash
flow from operations in recent years. Starting with the fourth quarter of 2014, we implemented measures to reduce cash outflow
for operations such that the required level of sales to achieve break-even results was reduced. These measures included (i) exiting
the large commercial segment which was operating at both an operating and cash flow loss, (ii) reducing staffing levels, (iii)
physically exiting the California market where its costs to operate were high, (iv) focusing on cash sales to customers and not
leasing to customers, (v) negotiating lower costs for equipment, and (vi) operating initiatives designed to improve profitability
such as reducing the length of cycle time for customer installations and lowering the cost of marketing.
Our historical operating losses have required us to raise financial
capital. During the fourth quarter of 2016, we raised $16.1 million, net of costs, and we raised an additional $16.0 million, net
of costs, during the first quarter of 2017. We used a portion of the proceeds from the financial capital raised to reduce accounts
payable, purchase materials to convert backlog to revenue and begin to execute our revenue growth strategy.
Revenue Growth Strategy
Prior to obtaining the exclusive POWERHOUSE™ license, we had
estimated that to operate profitably we would require approximately $16 million in quarterly revenue. Current quarterly revenue
is materially less than this amount and, accordingly, to be successful in increasing sales and resultant revenue, we are implementing
a revenue growth strategy which includes the following components:
|
·
|
Expand the size of our call center sales organization;
|
|
·
|
Expand the size of our field sales teams on the east coast and Sunetric,
small business commercial sales team, and construction organizations;
|
|
·
|
Expand the digital marketing program, as well as increase our spending
to generate greater customer leads while achieving desired cost of customer acquisition;
|
|
·
|
Make available to our customers, additional third-party providers
to finance customer acquisitions of our solar energy systems;
|
|
·
|
Expand our network of authorized third-party installers;
|
|
·
|
Invest in the POWERHOUSE™ license by obtaining UL Certification
for POWERHOUSE™ 3.0, a prerequisite for commercialization of the product and, upon achieving UL Certification, manufacture,
market and sell POWERHOUSE™ 3.0 to roofing companies; and
|
|
·
|
Invest in innovation for future sales and profitability, such as customer-centric
software, new products and services such as the sale of energy storage and energy audit services to attract new customers.
|
We believe that the use of the Dow trademark to market the POWERHOUSE™
3.0 as part of the TLA will provide increased brand recognition for the Company promoting growth in sales. The TSA provides us
with access to Dow personnel who are experienced in securing product UL Certification and who will assist RGS to obtain a UL Certification
of POWERHOUSE™ 3.0. We anticipate receiving the UL Certification during the first half of 2018. There are two principal markets
that we believe are well-suited for the POWERHOUSE™ product: (i) situations where a homeowner needs a new roof and (ii) new
home construction by developers; estimated markets of roughly 5 million and 1 million homes per annum, respectively. RGS plans
to take pre-orders in advance of final written UL Certification.
We generally recognize revenue from solar energy systems sold to
our customers when we install the solar energy system. Our business requires that we incur costs of acquiring solar panels and
labor to install solar energy systems on our customer rooftops up-front and receive cash from customers thereafter. As a result,
during periods when we are increasing sales, we expect to have negative cash flow from operations.
Explanation of Key Operating Metrics and
Other Items
We regularly review a number of metrics, including
the following key operating metrics, to evaluate our business, measure our performance, identify trends affecting our business,
formulate financial projections and make strategic decisions. Some of our key operating metrics are estimates that are based on
our management’s beliefs and assumptions and on information currently available to management. Although we believe that we
have a reasonable basis for each of these estimates, we caution you that these estimates are based on a combination of assumptions
that may prove to be inaccurate over time. Any inaccuracies could be material to our actual results when compared to our calculations.
Please see the section titled “Risk Factors” in this Quarterly Report on Form 10-Q for more information. Furthermore,
other companies may calculate these metrics differently than we do now or in the future, which would reduce their usefulness as
a comparative measure.
Statement of Operations
We took the necessary steps to reclassify our
statement of operations during the second quarter of 2017 to help our shareholders better understand the business through the eyes
of management. We concluded that it was appropriate to classify items to conform with operating metrics reported to investors and
the way management evaluates financial performance. Definitions of the statement of operations is as follows:
Revenue from installation of solar energy
systems
Revenue includes the contractual sales price
of solar energy systems substantially completed.
Revenue from leasing of solar energy systems
Revenue includes net amortization of unearned
revenue and projected expenses related to residential customer leases of solar energy systems.
Installation of solar energy systems expense
The expense of solar energy systems installed
principally include the costs of materials we purchase from manufacturers of photovoltaic equipment and the cost of personnel directly
involved with the installation of solar energy systems including direct labor of our construction crews and those of third party
integrators. In addition, cost of services includes the estimated cost of our limited warranty, travel costs, and fees we pay third
party financiers providing loans to our customers to finance their solar energy systems.
Service income and expense
Service income includes revenue from service
contracts with customers to provide maintenance on customer owned solar energy systems. In addition, it includes revenue from operating
and maintenance service provided to third-party owners of portfolios of solar energy systems. Service expense includes the labor
and material costs of servicing customers under service contracts and excess warranty expense over estimated warranty costs included
in the expense of solar energy systems sold.
Customer acquisition expense
Customer acquisition expense principally includes
compensation expense, including commissions, of our sales and marketing personal and expenses we incur to receive potential customer
leads from third party providers and digital marketing. Customer acquisition expense is a key metric for us as our goal is to acquire
customers at a cost enabling us to achieve a targeted contribution to recovery of overhead expenses.
Contract income (loss)
Contract income is a key metric for us because
it must be in excess of our operating expenses in order to achieve break-even and better results in future periods.
Operating expense
Operating expense consists of costs associated
with managing our business segments; Residential, Sunetric, POWERHOUSE™ and Other. These items include administrative costs
associated with sales, general and administrative expenses associated with administrative services such as product development,
legal settlements, legal, information systems (including core technology and telephony infrastructure), and accounting and finance.
It also includes outside professional fees (i.e., legal and accounting services), building expenses and other items associated
with general business administration.
Derivative and other
Derivative and other principally include changes
in fair value of derivative liabilities, loss on debt extinguishment, gain (loss) on sale of fixed assets, amortization of debt
discount, and interest expense.
Other Key Metrics
Backlog
Backlog is discussed below and an important
metric as we implement our revenue growth strategy.
Key Operational Metric, Gross Margin on
Residential Segment, Our Largest Segment
We utilize a job costing system whereby employees
record their time to projects. We accumulate the cost of idle time reflecting the cost we incur to maintain a construction organization
until our revenue grows, allowing for greater utilization of our construction organization. We anticipate an improvement in our
gross margin percentage in future periods from increased revenue from our implementation of our revenue growth strategy.
|
|
Three Months Ended
September 30, 2017
|
|
|
Nine Months
Ended September
30, 2017
|
|
|
Three Months
Ended September
30, 2016
|
|
|
Nine Months
Ended September
30, 2016
|
|
Gross margin % on actual installation time
|
|
|
29
|
%
|
|
|
28
|
%
|
|
|
29
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin % including idle time
|
|
|
16
|
%
|
|
|
13
|
%
|
|
|
-1
|
%
|
|
|
16
|
%
|
Backlog
Backlog represents the dollar amount of revenue that we may recognize
in the future from signed contracts to install solar energy systems that have not yet been installed. The backlog amounts we disclose
are net of cancellations and include anticipated revenues associated with (i) the original contract amounts, and (ii) change orders
for which we have received written confirmations from the applicable customers. Backlog may not be indicative of future operating
results, and projects in our backlog may be cancelled, modified or otherwise altered by customers. We can provide no assurance
as to the profitability of our contracts reflected in backlog. Backlog is not a measure defined by GAAP, and is not a measure of
contract profitability. Our methodology for determining backlog may not be comparable to methodologies used by other companies
in determining their backlog amounts.
The following table summarizes changes to our backlog by segment
during the nine-month period ended September 30, 2017:
(in thousands)
|
|
Residential
|
|
|
Sunetric
|
|
|
Totals
|
|
Backlog of December 31, 2016
|
|
$
|
6,927
|
|
|
$
|
2,448
|
|
|
$
|
9,375
|
|
Bookings from new awards (“Sales”)
|
|
|
2,953
|
|
|
|
82
|
|
|
|
3,035
|
|
Cancellations and reductions on existing contracts
|
|
|
(1,646
|
)
|
|
|
—
|
|
|
|
(1,646
|
)
|
Amounts recognized in revenue upon installation
|
|
|
(3,372
|
)
|
|
|
—
|
|
|
|
(3,372
|
)
|
Backlog at March 31, 2017
|
|
|
4,862
|
|
|
|
2,530
|
|
|
|
7,392
|
|
Bookings from new awards (“Sales”)
|
|
|
6,402
|
|
|
|
1,004
|
|
|
|
7,406
|
|
Cancellations and reductions on existing contracts
|
|
|
(1,870
|
)
|
|
|
(545
|
)
|
|
|
(2,415
|
)
|
Amounts recognized in revenue upon installation
|
|
|
(2,214
|
)
|
|
|
(494
|
)
|
|
|
(2,708
|
)
|
Backlog at June 30, 2017
|
|
|
7,180
|
|
|
|
2,495
|
|
|
|
9,675
|
|
Bookings from new awards (“Sales”)
|
|
|
8,048
|
|
|
|
1,809
|
|
|
|
9,857
|
|
Cancellations and reductions on existing contracts
|
|
|
(1,944
|
)
|
|
|
—
|
|
|
|
(1,944
|
)
|
Amounts recognized in revenue upon installation
|
|
|
(2,801
|
)
|
|
|
(876
|
)
|
|
|
(3,677
|
)
|
Backlog at September 30, 2017
|
|
$
|
10,483
|
|
|
$
|
3,428
|
|
|
$
|
13,911
|
|
We typically see an increase in the absolute number of cancellations
when sales increase. Nonetheless, our net sales after cancellations grew 307% in the three months ended September 30, 2017 as compared
to the three months ended September 30, 2016.
During the nine months ended September 30, 2017, we have increased
our direct sales representative’s headcount 152%. With this rapid growth in our sales headcount, we are intently focused
on continuing to develop and implement our sales training programs to increase our team’s productivity. We believe that by
supporting our growing sales force with sales training programs, we will enable them to address typical customer questions during
the sales and installation processes, increasing sales and reducing cancellations.
On October 12, 2017, we were notified by the Rhode Island National
Grid that approvals under its Renewable Energy Growth program for residential solar systems has been suspended, and that there
may be additional approvals made prior to March 31, 2018. A new program is scheduled to begin April 1, 2018. As of September 30,
2017, our backlog of $13.9 million includes $2.3 million of sales to Rhode Island residential homeowners not yet approved under
the current Renewable Energy Growth program. We believe that revenue from these contracts will be recognized when the new program
is expected begin during the second quarter of 2018.
We compete with larger capitalized firms for customers, employees,
and the services of third party financiers and installers and, accordingly, there can be no assurance that we will be successful
in meeting our break-even goal for revenue.
Backlog is a key metric for us as our goal is to increase our backlog.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies
or estimates during the nine months ended September 30, 2017 from those disclosed in our annual report on Form 10-K for the year
ended December 31, 2016.
Results of Operations
Three Months Ended September 30, 2017 Compared to Three Months
Ended September 30, 2016
Contract revenue:
Sale and installation of solar energy systems
.
Sale and installation of solar energy system revenue increased $1.4 million, or 59.9%, to $3.7 million during the three months
ended September 30, 2017, from $2.3 million during the three months ended September 30, 2016. The increase is primarily due to
further investments in the sales department to implement our revenue growth strategy such as increasing backlog, the precursor
to increasing installation revenue. Additionally, we recognized $0.7 million under percentage of completion accounting in Hawaii
on a commercial project. During the three months ended September 30, 2017, the residential segment installed 0.8 megawatts as
compared to 0.3 megawatts during the three months ended September 30, 2016; and Sunetric installed 0.3 megawatts during each of
the three month periods ended September 30, 2017 and 2016.
Service.
Service revenue increased $0.2 million,
or 101.3%, to $0.3 million during the three months ended September 30, 2017, from $0.1 million during the three months ended September
30, 2016. The increase is primarily due to a contract entered into with a third-party in the fourth quarter of 2016 to provide
service work for their existing customers.
Contract expenses:
Installation of solar energy systems
. Installation
of solar energy system expenses increased $1.4 million, or 66.9%, to $3.5 million during the three months ended September 30, 2017,
from $2.1 million during the three months ended September 30, 2016, which is attributable to the increase in installation revenue.
The Company uses gross margin percentage to measure performance utilizing an internal time reporting system allowing the Company
to measure both total incurred contract expense and contract expense excluding construction crew idle time. For the three-month
period ended September 30, 2017 and 2016, our residential segment’s gross margin without idle time remained consistent at
29%.
Service.
Service expense increased $0.2 million,
or 58.4%, to $0.4 million during the three months ended September 30, 2017, from $0.2 million during the three months ended September
30, 2016. The increase is primarily due to the additional costs attributed to a contract entered into with a third party in the
fourth quarter of 2016 to provide service work on their existing customers.
Customer acquisition.
Customer acquisition expense
increased $1.2 million during the three months ended September 30, 2017, or 196.2%, to $1.8 million during the three months ended
September 30, 2017 from $0.6 million during the three months ended September 30, 2016. This increase is due to increased hiring
in our sales department as well as an increase in marketing spend to obtain sufficient leads for the growing sales organization.
Litigation expense.
Litigation expense for the three months
ended September 30, 2017 was $0.08 million compared to $0 during the three months ended September 30, 2016. Our legal expenses
may increase in subsequent periods. See Note 4, Commitments and Contingencies.
Interest expense, debt accretion and loss on extinguishment.
As the Company is no longer party to a long-term loan agreement, interest expense, debt accretion expense and related loss on extinguishment
was zero as compared to $4.1 million for the three months ended September 30, 2016.
Nine Months Ended September 30, 2017 Compared to Nine Months
Ended September 30, 2016
Contract revenue:
Sale and installation of solar energy systems
.
Sale and installation of solar energy system revenue decreased $2.1 million, or 17.7%, to $9.8 million during the nine months ended
September 30, 2017, from $11.9 million during the nine months ended September 30, 2016. During the nine months ended September
30, 2017, installations decreased 0.2 megawatts as compared to the nine months ended September 30, 2016. Additionally, the average
sales price for the residential segment declined by 11.9% which corresponds to the decline in installation expenses.
Service.
Service revenue increased $0.5 million,
or 107%, to $0.9 million during the nine months ended September 30, 2017 from $0.4 million during the nine months ended September
30, 2016. The increase is primarily due to a contract entered into with a third-party in the 4
th
quarter of 2016 to
provide service work on their existing customers.
Contract expenses:
Installation of solar energy systems
. Installation
of solar energy system expenses decreased $1.6 million, or 14.5%, to $9.2 million during the nine months ended September 30, 2017,
from $10.8 million during the nine months ended September 30, 2016, which corresponds to the reduction of installation revenue
during this same time comparison. The Company uses gross margin percentage to measure performance utilizing an internal time reporting
system allowing the company to measure both total incurred contract expense and contract expense excluding construction crew idle
time. For the nine month period ended September 30, 2017, our residential segments gross margin without idle time improved
due to the Company reducing installation cycle time and focus on reducing the cost of equipment.
Service.
Service expense increased $0.3 million
to $1.2 million, or 37.4% during the nine months ended September 30, 2017, from $0.9 million during the nine months ended September
30, 2016. The increase is primarily due to the additional costs attributed to a contract entered into with a third party in the
fourth quarter of 2016 to provide service work on their existing customers.
Customer acquisition.
Customer acquisition expense
increased $2.0 million during the nine months ended September 30, 2017, or 99.8%, to $4.0 million during the nine months ended
September 30, 2017 from $2.0 million during the nine months ended September 30, 2016. This increase is primarily due to increased
hiring in our sales department as well as an increase in marketing spend to obtain higher quality leads.
Operating expense.
Operating expenses decreased $0.2 million,
or 2.8%, to $8.1 million during the nine months ended September 30, 2017 compared to $8.3 million during the nine months ended
September 30, 2016.
Interest expense, debt accretion and loss on extinguishment.
As the Company is no longer party to a long-term loan agreement, interest expense, debt accretion expense and related loss on extinguishment
was zero as compared to $5.1 million from the nine months ended September 30, 2016.
Litigation expense.
Litigation expenses during the nine months
ended September 30, 2017 was $0.2 million compared to $0.02 million during the nine months ended September 30, 2016. Our legal
expenses may increase in subsequent periods. See Note 4, Commitments and Contingencies.
Debt accretion expense and loss on extinguishment
. No accretion
expense or loss on extinguishment was recorded during the current quarter compared to $2.8 million during the nine months ended
September 30, 2016. On September 14, 2016, the Company raised $2.8 million of convertible preferred stock that was accounted
for as debt. By September 29, 2016, all of the convertible preferred stock was converted to Class A common stock of the Company,
extinguishing the debt. As the trading price of the Company’s stock was higher at conversion than the effective conversion
price per share to the debt holder, a loss on extinguishment was recorded for this 14-day period.
Seasonality
Our quarterly net revenue and operating results for solar energy
system installations are difficult to predict and have, in the past, and may, in the future, fluctuate from quarter to quarter
as a result of changes in state, federal, or private utility company subsidies, as well as weather, economic trends and other factors.
We have historically experienced seasonality in our solar installation business, with the first quarter representing our lowest
installation quarter of the year primarily due to adverse weather. We have historically experienced seasonality in our sales of
solar energy systems, with the fourth and first quarters of the year being less sales orders than the second and third quarters.
Liquidity and Capital Resources
We
experienced recurring operating losses and negative cash flow from operations in recent years. Starting with the fourth quarter
of 2014, we implemented measures to reduce our cash outflow for operations such that the required level of sales to achieve break-even
results was reduced. These measures included (i) exiting the large commercial segment which was operating at both an operating
and cash flow loss, (ii) reducing staffing levels, (iii) physically exiting the California market where its costs to operate were
high, (iv) focusing on cash sales to customers and not leasing to customers, (v) negotiating lower costs for equipment, and (vi)
operating initiatives designed to improve profitability such as reducing the length of cycle time for customer installations and
lowering the cost of marketing. We repaid in full and terminated our line-of-credit facility during the first quarter of 2017,
as our working capital was sufficient for current operations. See Note 3, Line of Credit. We believe there are sufficient financial
resources to operate for the ensuing 12 months
.
The historical operating losses have required us to raise financial
capital. During the fourth quarter of 2016, we raised $16.1 million, net of costs and an additional $16.0 million, net of costs
during the first quarter of 2017. See Note 5, Shareholders’ Equity. We used the proceeds from the financial capital raised
to reduce accounts payable, purchase materials to convert backlog to revenue and begin to execute our revenue growth strategy.
The 2017 capital raises enabled us to terminate our line-of-credit facility and related coterminous supply agreement.
Until we are successful in implementing our revenue growth strategy,
we expect to have cash outflow from operating activities. In addition, we expect that we will have cash outflow from operating
activities for the remainder of the year as we will utilize cash to increase revenue by (i) funding an anticipated level of rooftop
installations for customers, (ii) expanding our e-sales and field sales organizations and (iii) increasing our marketing spend
for lead generation.
Under the POWERHOUSE™ license agreement, upon achieving
UL certification, we will incur a liability of $2 million and plan to begin commercialization of POWERHOUSE™ 3.0 which will
require additional financial resources. Future commercialization of POWERHOUSE™ 3.0 will require financial capital that
we plan to satisfy with a combination of, to the extent available, (i) available cash, (ii) cash from common stock warrant exercises,
(iii) draws from an asset based lending facility we will seek to secure in the future, and (iv) new equity issuances.
During October 2017, holders of warrants
exercised warrants to purchase 674,096 shares of our Class A common stock, resulting in net proceeds of $1.1 million. As of the
end of October 2017, there remain outstanding warrants to purchase a total of 5,853,861 shares of Class A common stock. The funds
from the October 2017 warrant exercises were used to pay the initial Dow License fee payment of $1 million made by us on October
6, 2017.
The following table shows the number of outstanding warrants, as of November 7,
2017
and their associated exercise prices. We do not control when the investors exercise their warrants, and, accordingly, there can
be no assurance that the investors will exercise any warrants or whether we would receive any cash from the exercise of these warrants.
|
|
Number of
|
|
Exercise Price
|
|
Warrants
|
|
$1.270
|
|
|
137,593
|
|
$1.360
|
|
|
3,323
|
|
$2.400
|
|
|
1,609,974
|
|
$3.100
|
|
|
3,710,000
|
|
$3.125
|
|
|
120,000
|
|
$3.875
|
|
|
185,500
|
|
$8.250
|
|
|
30,834
|
|
Greater the $45.00
|
|
|
56,637
|
|
Total
|
|
|
5,853,861
|
|
Warrant holders have
the option of cashless exercise
201 Tariff Petition
Beginning in the second quarter of 2017, certain U.S. based solar
module manufacturers (the “parties”) filed a 201 Tariff Petition (“201”) claiming damages as a result of
foreign manufacturers exporting lower priced modules into the U.S. and recommended the cost of foreign manufactured modules have
a floor cost of $0.78 per watt, to be reduced over a four year period. Currently, the Company pays a weighted average cost less
than the potential floor cost. On September 22, 2017, the U.S. International Trade Commission (“ITC”) decided that
the domestic industry had suffered serious harm due to imports. After additional public hearings, on October 31, 2017 the ITC provided
remedy recommendations to the President of the United States which stated (i) that a tariff of 30% to 35% of the solar module cost
should be applied and (ii) that any such tariff not apply to certain North American treaty partners such as Canada. Approximately
90% of the equipment the Company purchases is from North American manufacturers and, accordingly, at this time, the Company does
not believe the tariff would directly impact these purchases. However, since the petition was filed, other market participants
have increased their level of purchasing of panels as a protective measure.
As the Company sells systems months in advance of their installation
and coupled with its cash management approach to adhere to just-in-time procurement of materials, it determined there was sufficient
exposure to installation margins to warrant bridge buying inventory at its current pricing and procuring panels in excess of current
needs into 2018. Accordingly, the Company has invested in its panel inventory, and as of September 30, 2017, believes that it has
sufficient panel inventory for planned installations into the beginning of 2018. Furthermore, the Company has continued its aggressive
procurement of panel inventory in the fourth quarter and is currently negotiating panel costs for 2018 procurement. These discussions
indicate that it is probable that the cost of panels will increase from that incurred for 2017, regardless of whether 201 applies
to manufacturers the Company acquires equipment from.
Cash Flows
The following table summarizes our primary sources (uses) of cash
during the periods presented:
|
|
For the Nine
Months Ended September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities – continuing operations
|
|
$
|
(13,031
|
)
|
|
$
|
(6,608
|
)
|
Operating activities – discontinued operations
|
|
|
(46
|
)
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(13,077
|
)
|
|
|
(6,507
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(744
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
15,539
|
|
|
|
7,281
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
1,718
|
|
|
$
|
784
|
|
Continuing Operations
Operating activities
. Cash outflow from operations for the
nine-month period ended September 30, 2017 increased $6.4 million as compared to the nine-month period ended September 30, 2016.
This increase was primarily due to (i) payments on prior vendor obligations, (ii) an increase in customer acquisition expense as
contemplated by the Company’s revenue growth strategy, and (iii) an increase in inventory and prepaid items.
Investing activities
. During the nine months ended September
30, 2017, we purchased software and equipment of $0.7 million, and capitalized costs related to the POWERHOUSE™ license of
$0.06 million. During the nine months ended September 30, 2016, we received proceeds of $0.01 million for the sale of equipment.
Financing activities.
Our financing activities provided
net cash of $15.5 million and $5.0 million during the nine months ended September 30, 2017 and 2016, respectively. Our net cash
provided by financing activities during the nine months ended September 30, 2017 reflected the net proceeds $0.2 million from the
2016 Note offering, net proceeds of $16.0 million from the issuance of common stock during the February 2017 offerings, offset
by repayment of our line-of-credit facility of $0.7 million. Our net cash provided by financing activities during the nine months
ended September 30, 2016 resulted from the net proceeds received from the 2016 Note offering of $1.5 million and additional borrowings
on our line of credit of $3.5 million.
Discontinued Operations
Operating activities
. Our operating activities used net cash
of $0.1 million and provided $0.1 million during the nine months ended September 30, 2017 and 2016, respectively.
Off-Balance Sheet Arrangements
We do not participate in transactions that generate relationships
with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, established
for the purpose of facilitating off-balance sheet arrangements or other limited purposes and as a result we do not have and are
not reasonably likely to have future off-balance sheet arrangements.
Risk Factors
We caution that there are risks and uncertainties that could cause
our actual results to be materially different from those indicated by forward-looking statements that, from time-to-time, we make
in filings with the U.S. Securities and Exchange Commission, news releases, reports, proxy statements, registration statements
and other written communications as well as oral forward-looking statements made by our representatives. These risks and uncertainties
include, but are not limited to, those risks set forth in Part II, Item 1A of this and other quarterly reports and listed in the
section entitled “RISK FACTORS” in our Annual Report on Form 10-K for the year ended December 31, 2016, which
is on file with the U.S. Securities and Exchange Commission. Except for the historical information contained herein, the matters
discussed in this analysis are forward-looking statements that involve risk and uncertainties, including, but not limited to, general
economic and business conditions, competition, pricing, brand reputation, consumer trends, and other factors which are often beyond
our control.
The risks and uncertainties we have described are not the only ones
facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also
affect our business operations. We do not undertake any obligation to update forward-looking statements except as required by law.