2. Significant Accounting Policies

No changes were made to the Company’s significant accounting policies during the year ended December 31, 2013.

Cash

Cash represents demand deposit accounts with financial institutions that are denominated in U.S. dollars.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company makes estimates of the collectability of its accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. The allowance for doubtful accounts was $618,000 and $1.1 million at December 31, 2013 and 2012, respectively. If the financial condition of our customers or the public utilities or financing companies were to deteriorate such that their ability to make payments to us was impaired, additional allowances could be required.

Inventory

Inventory consists primarily of solar energy system components (such as solar panels and inverters) located at the Company’s various warehouses and finished goods held for sale at its Solar Living Center located in Hopland, California. RGS states inventory at the lower of cost (first-in, first-out method) or market. The Company identifies the inventory items to be written down for obsolescence based on the item’s current sales status and condition. The Company writes down discontinued or slow moving inventories based on an estimate of the markdown to retail price needed to sell through its current stock level of the inventories. At December 31, 2013 and 2012, the Company estimated obsolete or slow-moving inventory to be $400,000 and $700,000, respectively, net of estimated reserves.

Property and Equipment

The Company states property and equipment at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed on the straight-line method over estimated useful lives, generally three to twenty years. RGS amortizes leasehold and building improvements over the shorter of the estimated useful lives of the assets or the remaining term of the lease or remaining life of the building, respectively.

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase consideration over the estimated fair value of assets acquired less liabilities assumed in a business acquisition. Goodwill is reviewed for impairment annually or more frequently if impairment indicators arise. As RGS operates in only one business segment, it assesses impairment at the Company level. The Company has the option of first assessing qualitative factors to determine whether events and circumstances indicate that it is more likely than not that the fair value of the Company is less than its carrying amount. If it is determined that the fair value of the Company is more likely than not greater than its carrying amount, then the two-step impairment test is unnecessary. If it is determined that the two-step impairment test is necessary, then for step one, RGS compares the estimated fair value of the Company with its carrying amount, including goodwill. If the estimated fair value of the Company exceeds its carrying amount, the Company’s goodwill considered not impaired. If the carrying amount of the Company exceeds its estimated fair value, the second step of the goodwill impairment test to measure the amount of impairment loss is performed. The Company uses either a comparable market approach, traditional present value method, or some combination thereof to test for potential impairment. The use of present value techniques requires us to make estimates and judgments about future cash flows. These cash flow forecasts are based on assumptions that are consistent with the plans and estimates RGS uses to manage its business. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. Application of alternative assumptions and definitions could yield significantly different results.

The Company’s goodwill balances were $1.9 million and zero at December 31, 2013 and 2012, respectively, and other intangibles balances were $480,000 and zero at December 31, 2013 and 2012, respectively. The other intangibles are comprised of backlog acquired from Syndicated Solar, Inc. and will be amortized to selling and operating expenses over a period of less than 12 months.

The Company had impaired all goodwill and other intangibles at September 30, 2012 (see Note 4. Goodwill and Other Asset Impairments). For the year ended December 31, 2012, amortization expense was $0.2 million. During the year ended December 31, 2013, the Company recorded $1.9 million of goodwill as a result of the acquisition of Syndicated Solar, Inc. There is no amortization expense recorded for the year ended December 31, 2013.

Purchase Accounting

RGS accounts for business acquisitions using the purchase method. In determining the estimated fair value of certain acquired assets and liabilities, the Company makes assumptions based upon historical and other relevant information and, in some cases, reports of independent valuation experts. Assumptions may be incomplete, and unanticipated events and circumstances may occur that could affect the validity of such assumptions, estimates, or actual results. As a result of the acquisition of Syndicated and Mercury Energy, Inc., RGS incurred acquisition-related costs that are required to be expensed as incurred, including subsequent adjustments to valuation entries made at the time of the acquisition. For the twelve months ended December 31, 2013, the Company recorded $2.0 million of such costs.

Revenue Recognition

Revenue are derived primarily from contracts for the installation of solar energy systems. RGS recognizes revenue from fixed price contracts using either the completed contract or percentage-of-completion method, based on the size of the energy system installation. RGS recognizes revenue from energy system installations of less than 100 kilowatts, or kW, when the installation is substantially complete and recognizes revenue from energy system installations equal to or greater than 100 kW on a percentage-of-completion basis, measured by the percentage of contract costs incurred to date to total estimated costs for each contract. The Company recognizes amounts billed to customers for shipping and handling as revenue at the same time that the revenues arising from the product sale are recognized. RGS includes shipping and handling costs, which were approximately $500,000, $500,000, and $100,000 for 2013, 2012, and 2011, respectively, in selling and operating expense along with other fulfillment costs.

The assets “Costs in excess of billings on uncompleted contracts” and “Deferred costs on uncompleted contracts” represent costs incurred plus estimated earnings in excess of amounts billed on percentage-of-completion method contracts and costs incurred but deferred until recognition of the related contract revenue on completed-method contracts, respectively. The liability “Billings in excess of costs on uncompleted contracts” represents billings in excess of related costs and earned profit on percentage-of-completion method contracts. RGS bills our large installation customers for contract performance progress according to milestones defined in their respective contracts. The prerequisite for billing is the completion of an application and certificate of payment form as per the contract, which is done after each month end. Unbilled receivables were immaterial at December 31, 2013 and 2012.

Deferred revenue consists of solar energy system installation fees billed to customers for projects which are not yet completed as on the balance sheet date.

Allocation of Costs

Historically, Gaiam provided RGS with administrative, technical accounting advisory, public financial reporting and related office services under the Intercorporate Services Agreement. During 2013, the Company’s reliance on Gaiam for services provided under the Intercorporate Services Agreement decreased to the point that RGS and Gaiam terminated the agreement on December 19, 2013. The accompanying financial statements include an allocation of these expenses. The allocation is based on a combination of factors, including revenue and operating expenses. The Company believes the allocation methodologies used are reasonable and result in an appropriate allocation of costs incurred by Gaiam and its subsidiaries on the Company’s behalf. However, these allocations may not be indicative of the cost of future services as the company operates on a standalone basis.

Share-Based Compensation

RGS recognizes compensation expense for share-based awards based on the estimated fair value of the award on date of grant. The Company measures compensation cost at the grant date fair value of the award and recognizes compensation expense based on the probable attainment of a specified performance condition or over a service period. The Company uses the Black-Scholes option valuation model to estimate the fair value for purposes of accounting and disclosures. In estimating this fair value, certain assumptions are used (see Note 12. Share-Based Compensation), consisting of the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of different estimates for any one of these assumptions could have a material impact on the amount of reported compensation expense.

Income Taxes

RGS provides for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax bases of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset is more likely than not. The Company’s effective tax rate remains fairly consistent. RGS has significant net operating loss carryforwards and will re-evaluate at the end of each reporting period whether it expects it is more likely than not that the deferred tax assets will be fully recoverable through the reversal of taxable temporary differences in future years as a result of normal business activities. The Company has agreed under our tax sharing agreement with Gaiam to make payments to Gaiam as RGS utilizes certain of its net operating losses in the future (see Note 13. Income Taxes).

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. RGS measures the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, RGS is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company’s subjective assumptions and judgments which can materially affect amounts recognized in its consolidated balance sheets and statements of operations. The result of the reassessment of the Company’s tax positions did not have a material impact on its consolidated financial statements. RGS’ federal and state tax returns for all years after 2009 are subject to future examination by tax authorities for all our tax jurisdictions. The Company recognizes interest and penalties related to income tax matters in interest expense and general and administration expenses, respectively.

Net Loss Per Share

RGS computes net loss per share by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if options or warrants to issue shares of the Company’s Class A common stock were exercised. Weighted average common share equivalents of 7,012,000, 2,173,000 and 1,262,000 shares have been omitted from net loss per share for 2013, 2012 and 2011, respectively, as they are anti-dilutive.

The following table sets forth the computation of basic and diluted net income (loss) per share:


	For the Years Ended December 31,
(In thousands, except per share data)	2013		2012		2011
Numerator for basic and diluted net loss per share	$	(11,300)	$	(47,206)	$	(1,900)
Denominator:
Weighted average shares for basic net loss per share		29,486		26,673		23,572
Effect of dilutive securities:
Weighted average of common stock, stock options and warrants		—		—		—

Denominators for diluted net loss per share		29,486		26,673		23,572

Net loss per share—basic	$	(0.38)	$	(1.77)	$	(0.08)

Net loss per share—diluted	$	(0.38)	$	(1.77)	$	(0.08)

Concentration of Risk

RGS has a potential concentration of credit risk in our accounts receivable in that two financing companies that purchase and then lease installed solar energy system to host users and two commercial customers accounted for 24%, 14%, 4% and 2% respectively, of our accounts receivable as of December 31, 2013.

The Company also has a potential concentration of supply risk in that during 2013 it purchased approximately 30% of the major components for its solar installations from a single supplier.

Sales to the Company’s three largest customers for 2013 accounted for approximately 21%, 12% and 6%, respectively, of our total net revenue.

Use of Estimates and Reclassifications

The preparation of financial statements in accordance with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and disclosures. Although these estimates are based on management’s knowledge of current events and actions the Company may undertake in the future, actual results may be different from the estimates.

Warrant Accounting

The Company accounts for common stock warrants and put options in accordance with applicable accounting guidance provided in Financial Accounting Standards Board (“FASB”) ASC 480, Liabilities – Distinguishing Liabilities from Equity, as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement. The common stock warrants are accounted for as a liability due to a provision which allows for the warrant holder to require redemption, at the intrinsic value of the warrant, upon a change of control. We classify these derivative liabilities on the condensed consolidated balance sheets as a long term liability, which is revalued at each balance sheet date subsequent to the initial issuance. We use a Monte Carlo pricing model to value these derivative liabilities. The Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. In building the Monte Carlo pricing model, the Company assumed a 15% probability of a change in control and used 20 nodes (See Note 3. Fair Value Measurements). As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Changes in the fair value of the warrants are reflected in the condensed consolidated balance sheet as change in fair value of warrant liability, with an offsetting non-cash entry recorded as interest.

During 2013, net non-cash credits of approximately $2 million were recorded as interest income to reflect changes in fair value of outstanding warrants. In the event warrants are exercised or expire without being exercised, the fair value of the warrant liability is reduced by the number of warrants exercised or expired multiplied by the then fair value of the each warrant. The tables below summarize warrant activity for 2013 and assumptions utilized to value the warrants (in thousands except for per warrant data):


	Original Warrant Issue Date
	June 3, 2013			November 15, 2013			Total as of December 31, 2013
Value of warrants issued	$	4,392		$	13,205		$	17,597
Changes in fair value, net		(175	)		(1,851	)		(2,026	)
Value of warrants exercised		(500	)					(500	)

Value of warrants at December 31, 2013	$	3,717		$	11,354		$	15,071

Number of warrants outstanding		1,655			5,015			6,670

Assumptions used to estimate warrant values:


	Issuance Date
	June 3, 2013						November 15, 2013
	At Issuance			At December 31, 2013			At Issuance			At December 31, 2013
Class A Common Stock: Closing Market Price	$	2.94		$	3.02		$	3.21		$	3.02
Market Price Volatility		102.93	%		95	%		95	%		95	%
Expected average term of warrants, in years		5			4.5			5.5			5.5
Expected dividend yield		0			0			0			0