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RSOL > SEC Filings for RSOL > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for REAL GOODS SOLAR, INC.

Form 10-Q for REAL GOODS SOLAR, INC.


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this document. This section is designed to provide information that will assist in understanding our condensed consolidated financial statements, changes in certain items in those statements from period to period, the primary factors that caused those changes and how certain accounting principles, policies and estimates affect the condensed consolidated financial statements.

Overview

We are a leading provider of turnkey commercial and residential solar energy solutions, with more than 13,000 solar systems in place. We also have more than 33 years of experience in solar energy, beginning with the sale in 1978 of the first solar photovoltaic panels in the United States. With 16 offices across the West and the Northeast, we are one of the largest solar energy installers in the U.S.

Our revenue primarily results from the installation of solar energy systems. We also derive a portion of our revenue from the retail sale of renewable energy products. Our expenses primarily consist of labor costs incurred in connection with solar installations, product costs for solar photovoltaic modules and other products sold, and related office and warehouse costs.

During the third quarter of 2012, we made significant progress toward the integration of Alteris and centralization of key operating functions to Colorado, and expect to substantially complete such work during the fourth quarter of 2012. We have significantly invested in operating expenses and working capital toward such efforts. We believe that this will result in an efficient and scalable infrastructure that can leverage expanded geographical diversity and pursue a new mix of significant residential and commercial customers. While the solar manufacturing industry has struggled based on oversupply and global pricing competition, downstream distributed solar power integrators have benefited from reduced costs. Financing companies have entered the market to enable compelling financing terms for homeowners and businesses, including no money down leasing. We continue to expect strong demand


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for both residential and commercial solar installations, despite the overall economic weakness in the United States. As one of the few national solar Efficient Power Conversion (EPC) providers, we expect to capitalize on our expanded footprint and the evolving U.S. solar industry.

Results of Operations

The following table sets forth certain financial data as a percentage of revenue
for the periods indicated:



                                          Three Months Ended           Nine Months Ended
                                             September 30,               September 30,
                                           2012          2011          2012          2011
 Net revenue                                 100.0 %      100.0 %        100.0 %      100.0 %
 Cost of goods sold                           78.2 %       75.1 %         73.5 %       73.5 %

 Gross profit                                 21.8 %       24.9 %         26.5 %       26.5 %


 Expenses:
 Selling and operating                        30.1 %       21.9 %         35.2 %       22.9 %
 General and administrative                   12.2 %        3.8 %         10.0 %        3.6 %
 Acquisition-related costs                      -  %        1.2 %           -  %        3.5 %
 Goodwill and other asset impairments         83.5 %        1.2 %         33.3 %        3.5 %

 Total expenses                              125.8 %       26.9 %         78.5 %       30.0 %


 Loss from operations                       -104.0 %       -2.0 %        -52.0 %       -3.5 %

 Interest and other expense                   -0.5 %       -0.3 %         -0.5 %       -0.2 %

 Income tax expense (benefit)                 43.5 %       -0.8 %         13.2 %       -0.8 %


 Net loss                                   -296.0 %       -1.5 %        -65.7 %       -2.9 %

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Net revenue. Net revenue decreased $5.2 million, or 16.6%, to $26.4 million during the third quarter of 2012 from $31.6 million during the third quarter of 2011. The revenue decline was primarily attributable to the acquisition of Alteris, partially offset by reduced revenue due to the direct supplying to customers by financing companies of certain components used on residential projects in order for the financiers to take advantage of expiring tax benefits (Safe Harbor). This unusual sourcing activity during the third quarter of 2012 reduced net revenue, but had no material impact on our gross profit dollars.

Gross profit. Gross profit decreased $2.1 million, or 27.0%, to $5.7 million during the third quarter of 2012 from $7.9 million during the third quarter of 2011. As a percentage of net revenue, gross profit decreased to 21.8% during the third quarter of 2012 from 24.9% during the third quarter of 2011. The 310 basis point decrease in gross margin primarily reflects the reduction in the mix of residential projects that produce higher gross margins over commercial projects. We expect a higher mix of commercial projects in 2012 over 2011.

Selling and operating expenses. Selling and operating expenses increased $1.0 million, or 14.6%, to $7.9 million during the third quarter of 2012 from $6.9 million during the third quarter of 2011. As a percentage of net revenue, selling and operating expenses increased to 30.1% during the third quarter of 2012 from 21.9% during the third quarter of 2011. The increase in selling and operating expenses is attributable to increased headcount, marketing spend and travel expenses.

General and administrative expenses. General and administrative expenses increased $2.0 million, or 170.5%, to $3.2 million during the third quarter of 2012 from $1.2 million during the third quarter of 2011. The increase in general and administrative expenses is due to investments in the new corporate headquarters in Colorado, as well as investments in executive and shared service personnel subsequent to the Alteris merger.

Goodwill and other asset impairments. Goodwill and other asset impairments were $22.0 million for the third quarter of 2012 and were comprised of noncash impairment charges of $19.7 million for goodwill, $2.1 million for property and equipment, and $0.2 million for other intangibles. We estimated the fair value of our business for the intangibles impairment analysis based on the quoted market price for our Class A common stock (level one input of the fair value hierarchy), as adjusted by our judgmental qualitative factors (level three of the fair value hierarchy). The impairment of our property and equipment was based on market place property comparables (level two of the fair value hierarchy). These noncash impairments were necessitated by the trading price of our Class A common stock, recent operating losses, and financial forecasts.


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Income Tax Expense. Income tax expense was $11.5 million for the third quarter of 2012 and includes a $14.5 million noncash charge for the establishment of a valuation allowance for all of our net deferred tax assets.

Net loss. As a result of the above factors, net loss for the third quarter of 2012 was $39.0 million, or $1.46 per share, as compared to $0.5 million, or $0.02 per share, for the same period last year.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net revenue. Net revenue decreased $2.9 million, or 4.2%, to $66.1 million during the nine months ended September 30, 2012 from $69.0 million during the nine months ended September 30, 2011. The revenue decline was primarily attributable to the acquisition of Alteris, partially offset by reduced revenue due to the direct supplying to customers by financing companies of certain components used on residential projects in order for the financiers to take advantage of expiring tax benefits (Safe Harbor). This unusual sourcing activity during the nine months ended September 30, 2012 reduced net revenue, but had no material impact on our gross profit dollars.

Gross profit. Gross profit decreased $0.8 million, or 4.2%, to $17.5 million during the nine months ended September 30, 2012 from $18.2 million during the nine months ended September 30, 2011. As a percentage of net revenue, gross profit remained consistent at 26.5% during the nine months ended September 30, 2012 and 2011. The decreased in gross profit primarily reflects the reduction in the mix of residential projects that produce higher profits over commercial projects. We expect a higher mix of commercial projects in 2012 compared to 2011.

Selling and operating expenses. Selling and operating expenses increased $7.7 million, or 48.6%, to $23.4 million during the nine months ended September 30, 2012 from $15.8 million during the nine months ended September 30, 2011. As a percentage of net revenue, selling and operating expenses increased to 35.5% during the nine months ended September 30, 2012 from 22.9% during the nine months ended September 30, 2011. The increase in operating expenses is attributable to the consolidation of Alteris with centralization and addition of resources at our Colorado headquarters.

General and administrative expenses. General and administrative expenses increased $3.9 million, or 154.3%, to $6.4 million during the nine months ended September 30, 2012 from $2.5 million during the nine months ended September 30, 2012. The increase in general and administrative expenses is due to investments in the new corporate headquarters in Colorado, as well as investments in executive and shared service personnel subsequent to the Alteris merger.

Goodwill and other asset impairments. Goodwill and other asset impairments were $22.0 million for the nine months ended September 30, 2012 were comprised of noncash impairment charges of $19.7 million for goodwill, $2.1 million for property and equipment, and $0.2 million for other intangibles. We estimated the fair value of our business for the intangibles impairment analysis based on the quoted market price for our Class A common stock (level one input of the fair value hierarchy), as adjusted by our judgmental qualitative factors (level three of the fair value hierarchy). The impairment of our property and equipment was based on market place property comparables (level two of the fair value hierarchy). These noncash impairments were necessitated by the trading price of our Class A common stock, recent operating losses, and financial forecasts.

Income Tax Expense. Income tax expense was $8.7 million for the nine months ended September 30, 2012 and includes a $14.5 million noncash charge for the establishment of a valuation allowance for all of our net deferred tax assets.

Net loss. As a result of the above factors, the net loss for the nine months ended September 30, 2012 was $43.4 million, or $1.63 per share, as compared to $2.0 million, or $0.09 per share, for the same period last year.

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 slowest installation quarter of the year. Much of the seasonality in our business in past years has been offset by the timing of government activities as well as strong organic growth. With the addition of Alteris, we expect increased seasonal fluctuations due to the severity of winters in the northeast.

Liquidity and Capital Resources

Our capital needs arise from capital related to acquisitions of new businesses, working capital required to fund our purchases of solar photo voltaic modules and inverters, replacements, expansions and improvements to our infrastructure, and future growth. These capital requirements depend on numerous factors, including business acquisitions, the ability to attract new solar energy system installation customers, market acceptance of our product offerings, the cost of ongoing upgrades to our product offerings, the level of expenditures for sales and marketing, the level of investment in support systems and facilities and other factors. The timing and amount of these capital requirements are variable and may fluctuate from time to time and cannot accurately be predicted.


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To the extent we have or can arrange available capital, we plan to continue to pursue acquisitions and other opportunities to expand our sales territories, technologies, and products and increase our sales and marketing programs as needed. We did not have any material commitments for capital expenditures as of September 30, 2012, and we do not presently have any plans for future material capital expenditures.

On July 22, 2011, Alteris entered into a new financing arrangement with a bank to fund commercial solar installations. Under a master lease agreement between a project finance subsidiary of Alteris and the bank, the project finance subsidiary may form new subsidiaries that will enter into sale leaseback arrangements with solar installation customers to finance specifically designated solar installations. The project finance entities will grant a security interest in substantially all their assets, and the project finance subsidiary's equity will be pledged by Alteris on a non-recourse basis to the bank. Alteris will provide limited unsecured guarantees of payment and performance of the obligations of the project finance entities, including operating, maintenance and indemnity obligations and payment of certain fees and expenses. This financing arrangement would not generate capital for use in our business, but instead would offer a financing alternative to our commercial installation customers. As of September 30, 2012, there were no commercial solar installations funded under this financing arrangement.

On November 13, 2012, our wholly owned subsidiaries Real Goods Energy Tech, Inc., a Colorado corporation, Real Goods Trading Corporation, a California corporation, Earth Friendly Energy Group Holdings, LLC, a Delaware limited liability company, Alteris Renewables, Inc., a Delaware corporation, Earth Friendly Energy Group, LLC, a Delaware limited liability company, Solar Works, LLC, a Delaware limited liability company, Alteris RPS, LLC, a Delaware limited liability company and Alteris ISI, LLC, a Delaware limited liability company, entered into a Second Loan Modification and Reinstatement Agreement with Silicon Valley Bank (the "Loan Agreement Amendment") pursuant to which the parties thereto agreed to certain amendments to the Loan and Security Agreement, dated as of December 19, 2011, among them (as amended by the First Loan Modification Agreement, dated as of August 28, 2012, and together with the Loan Agreement Amendment, the "Loan Agreement").

Under the Loan Agreement Amendment, the amount of available credit under the revolving line of credit was reduced from $7.0 million to $6.5 million, the Borrowing Base (as defined in the Loan Agreement) was reduced from 80% of Eligible Accounts (as defined in the Loan Agreement) to 75% of Eligible Accounts, and the maturity date was extended from October 30, 2012 to March 31, 2013. The Loan Agreement also increased the interest rate on borrowings from the greater of the bank's prime rate or 4.00%, plus 2.75%, to the greater of the bank's prime rate or 4.00%, plus 4.75%. The interest rate accruing on borrowings during a Streamline Period (as defined in the Loan Agreement) increased from the greater of the bank's prime rate or 4.00%, to the greater of the bank's prime rate or 4.00%, plus 2.75%.

Also, as amended, the Loan Agreement now requires the borrowers to pay a termination fee of up to an aggregate of $0.3 million in cash or a warrant exercisable for shares of our Class A common stock on the earlier to occur of the maturity date and repayment in full of the indebtedness and all other obligations under the Loan Agreement, and a final payment fee of $30 thousand in cash upon the earlier to occur of March 31, 2013 and the termination of the revolving line of credit under the Loan Agreement.

In the Loan Agreement Amendment, Silicon Valley Bank waived the default resulting from our failure to pay the debt by the maturity date of October 30, 2012. The borrowers paid Silicon Valley Bank a $50 thousand extension fee and agreed to reimburse the bank for certain expenses incurred in connection with entering into the Loan Agreement Amendment. A condition precedent to the effectiveness of the Loan Modification Agreement is that we have received a commitment for not less than $2.0 million in additional capital from the issuance of additional equity or subordinated debt and that the maturity date for our existing $1.7 million loan from Gaiam is extended from December 30, 2012 to no earlier than April 1, 2013.

Upon the closing of the Alteris transaction on December 19, 2011, we received commitments from Riverside to make us a single loan of up to $3.15 million and from Gaiam to loan us up to $1.7 million. Gaiam funded its loan commitment on December 30, 2011. Riverside loaned us $3.0 million on May 4, 2012 and another $150 thousand on June 20, 2012. The loans are for a period of 12 months, and bear interest at a rate of 10%; however, if the loan is repaid on or prior to the first anniversary of the date on which the loan was made, the accrued interest is waived. The loans are subordinate to all indebtedness for borrowed money owed by us to any lenders unaffiliated with us. Payment of the unpaid principal and all accrued but unpaid interest under a loan is accelerated and become immediately due and payable upon the occurrence of certain events related to proceedings under bankruptcy, insolvency, receivership or similar laws, the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for our company or a substantial part of our assets, and our making a general assignment for the benefit of creditors.

On November 13, 2012, we entered into a Loan Commitment with Gaiam and Riverside pursuant to which each agreed to advance to us up to an additional $1.0 million in cash upon request from us until March 31, 2013 at an annual interest rate of 10% and with a maturity date of April 26, 2013. In addition, Gaiam agreed to extend the maturity date for the $1.7 million existing loan from Gaiam from December 30, 2012 to April 30, 2013. The Gaiam loan maturity date extension is contingent upon us paying all interest then owed on the existing loan. Further, the Loan Commitment also requires us to execute and deliver to Gaiam an option agreement, reasonably acceptable to both parties, permitting Gaiam to purchase for $0.2 million all tenant improvements constructed by us in our principal office space leased by us from Gaiam. In addition, we agreed to amend our lease to cancel, effective December 31, 2012, the $3 per square foot credit set forth in the current lease.

Gaiam owns approximately 38% of our Class A common stock and is one of our creditors. Riverside owns approximately 29% of our Class A common stock and is one of our creditors. Pursuant to the terms of a Shareholders Agreement, Gaiam and Riverside each has the right to designate a certain number of individuals for appointment or nomination to our board of directors, tied to their respective ownership of our Class A common stock.

At September 30, 2012, our cash balance was $3.8 million. The maturity date for our Silicon Valley Bank revolving line of credit with current capacity and outstanding borrowings of $6.5 million has been extended from October 30, 2012 to March 31, 2013. Our related party debt of $1.7 million owed to Gaiam, Inc. that matures on December 30, 2012 will be extended to April 30, 2013. We also obtained additional capital commitments from our two largest shareholders and engaged an investment banker to seek new investors. Furthermore, in response to our current financial condition, we are negotiating with other financial institutions to obtain a new credit facility to replace the Silicon Valley Bank revolving line of credit. In addition, we will continue to make operational improvements to reduce our operating cash requirements. With the completion of the debt extensions and additional commitments and achievement of some or all of the above noted remaining initiatives, while there can be no assurances, we expect to be able to continue to operate through 2013, and thereby generate adequate cash flow to meet our debt obligations.


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Cash Flows

The following table summarizes our primary sources (uses) of cash during the
periods presented:



                                                   Nine Months Ended
                                                     September 30,
              (in thousands)                      2012           2011
              Net cash provided by (used in):
              Operating activities              $ (17,204 )    $    851
              Investing activities                   (157 )       3,901
              Financing activities                  9,375        (3,248 )

              Net change in cash                $  (7,986 )    $  1,504

Operating activities. Our operating activities used net cash of $17.2 million and provided net cash of $0.9 million during the nine months ended September 30, 2012 and 2011, respectively. Our net cash used by operating activities during the nine months ended September 30, 2012 was primarily attributable to our net loss of $43.4 million, decreased accounts payable and accrued liabilities of $12.9 million, increased costs in excess of billings on uncompleted contracts of $2.7 million, and decreased deferred revenue and other current liabilities of $1.8 million, partially offset by noncash adjustments to our net loss of $32.0 million, decreased accounts receivable of $6.1 million and decreased inventory of $5.8 million. A significant portion of the reduction in accounts payable reflects payments for Alteris liabilities assumed on December 19, 2011. Our net cash provided by operating activities during the nine months ended September 30, 2011 was primarily attributable to decreased accounts receivable and deferred costs on uncompleted contracts and advertising of $4.2 million and $0.6 million, respectively, increased deferred revenue and other current liabilities and accounts payable of $1.7 million and $1.2 million, respectively, and decreased other assets and noncash adjustments to net loss of $0.4 million each, partially offset by decreased costs in excess of billings on uncompleted contracts of $3.2 million, net loss of $2.0 million, and decreased accrued liabilities and billings in excess of costs on uncompleted contracts of $1.3 million and $1.0 million, respectively.

Investing activities. Our investing activities used net cash of $0.2 million and provided net cash of $3.9 million during the nine months ended September 30, 2012 and 2011, respectively. Our net cash used by investing activities during the nine months ended September 30, 2012 was primarily attributable to the purchase of property and equipment for $0.4 million, partially offset by a decrease in restricted cash of $0.2 million. Our net cash provided by investing activities during the nine months ended September 30, 2011 was primarily attributable to $3.4 million of cash acquired from our acquisition of Alteris and reduction in restricted cash of $0.7 million, partially offset by the acquisition of property and equipment of $0.2 million.

Financing activities. Our financing activities provided net cash of $9.4 million and used net cash of $3.3 million during the nine months ended September 30, 2012 and 2011, respectively. Our net cash provided by financing activities during the nine months ended September 30, 2012 was primarily the result of borrowings on our line of credit of $6.5 million and a loan from a related party of $3.2 million, partially offset by payments on debt and capital lease obligations of $0.3 million. Our net cash used by financing activities during the nine months ended September 30, 2011 was primarily the result of the repayment of borrowings on Alteris' line of credit and debt of $2.2 million and the repurchase 379,400 of our Class A common shares for $1.1 million.

In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, non-controlling investment, strategic relationship and other business combination opportunities in the solar energy markets. For any future investment, acquisition, or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities, or incurring additional indebtedness.

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, which have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

Risk Factors

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications as well as oral forward looking statements made from time to time by our representatives. These risks and uncertainties include, but are not limited to, those risks listed in this report and our Annual Report on Form 10-K for the year ended December 31, 2011. 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. We do not undertake any obligation to update forward-looking statements except as required by law.


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NASDAQ Non-Compliance

On September 26, 2012, Real Goods Solar, Inc. (the "Company") received a letter from The Nasdaq Stock Market ("NASDAQ"), notifying us that for the last 30 consecutive business days, the bid price of our Class A common stock had closed below the minimum $1.00 per share requirement for continued inclusion on NASDAQ based on Listing Rule 5450(a)(1), and describing a timetable for bringing us into compliance with that rule.

Our Class A common stock remains listed on NASDAQ under the symbol RSOL. Under Listing Rule 5810(c)(3)(A), we have 180 calendar days, or until March 25, 2013, to regain compliance. If at any time before then, our Class A common stock has a closing bid price of $1.00 or more for a minimum of 10 consecutive business days, NASDAQ staff will notify us that it has regained compliance.

If we have not met the requirements of Rule 5450(a)(1) by March 25, 2013, but meet the continued listing requirement for market value of publicly held shares and all other applicable standards for initial listing on The Nasdaq Capital Market (other than the minimum bid price requirement), then we may be eligible for an additional 180 day compliance period by submitting an application to . . .

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