Organization, Nature of Operations, and Principles of Consolidation

9 Months Ended

Sep. 30, 2015

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization, Nature of Operations, and Principles of Consolidation

1. Organization, Nature of Operations, and Principles of Consolidation

Real Goods Solar, Inc. (the “Company” or “RGS”) is a residential and small commercial solar energy engineering, procurement, and construction firm.

Discontinued Operations

During 2014, the Company committed to a strategic shift of its business resulting in a plan to sell certain net assets and rights, and the attrition of substantially completed contracts over the following twelve months comprising its large commercial installations business. Accordingly, the assets and liabilities, operating results, and operating and investing activities cash flows for the large commercial segment are presented as a discontinued operation, separate from the Company’s continuing operations, for all periods presented in these condensed consolidated financial statements and footnotes, unless indicated otherwise. See Note 11. Discontinued Operations.

Liquidity and Financial Resources Update

The following conditions or events have been evaluated by management: (i) the U.S Securities and Exchange Commission subpoena initially disclosed as a Risk Factor in the Company’s second quarter report on Form 10-Q and subsequently updated in this quarter’s Form 10-Q which identified, among other matters, that the Company would be subject to material legal expenses, (ii) the Company incurred material legal expenses during the third quarter and, its insurance carrier has denied reimbursement, (iii) the Company requires additional funds to implement its plans to grow its sales and construction capabilities, and (iv) the Company’s lender has waived the covenant default (see Note 3. Revolving Line of Credit) and amended the SVB Loan (defined below) to replace an EBITDA-based covenant with a liquidity convenant. To increase liquidity, the Company could sell assets, materially reduce operating costs and seek extended terms for its obligations; however, such actions, should they be successful, would adversely impact future operating results. In evaluating these conditions and events in the aggregate, management determined that in order to continue its plan to increase its sales and construction capabilities, meet its obligations for the next twelve months, and also to comply with the liquidity covenant of the amended SVB Loan, it is necessary that the Company raise additional capital. The Company has engaged an investment-banking firm to assist the Company with raising additional capital, expected to occur before November 30, 2015. Although management believes that it has demonstrated track record of raising capital, no assurances can be given that it will be successful in raising such capital or in sufficient amounts. If additional capital was not raised, the Company would be required to curtail its plans to expand its sales and construction capabilities and instead materially reduce operating expenses, dispose of assets, as well as seek extended terms on its obligations, the effect of which would adversely impact future operating results. No assurances can be given that the Company would be successful in reducing its operating expenses, disposing of assets or seeking extended terms on its obligations.

In recent years, the Company has reported recurring operating losses and negative cash from operations, resulting in not paying vendors on a timely basis. To address these circumstances, the Company has taken actions designed to position the Company to improve its financial condition and to operate profitably in the future including (i) exiting the large commercial segment, which was operating at a significant operating and cash flow loss, (ii) reducing its operating cost infrastructure through reductions in its workforce and implementing new commission and marketing spend programs, (iii) arranging for new capital with its June 2015 Offering and the February 2015 Offering of Class A common stock and warrants resulting in aggregate of approximately $16.5 million and its planned offering during the fourth quarter of 2015 (see Note 12. Subsequent Events), (collectively, the “2015 Offerings”), and (iv) converting the Company’s subordinated debt to equity. However, if following the planned offering during the fourth quarter of 2015, operational and sales initiatives are not successful in significantly reducing historical losses from operations, the Company may not have sufficient funds to repay any outstanding borrowings as they come due or to fund its operating cash needs for the next twelve months. Such a situation would likely arise if the Company (i) is unsuccessful in its efforts to increase its sales and resulting revenue, (ii) encounters unplanned operational difficulties or (iii) the timing of collection of accounts receivable and payments of accounts payable are significantly different than anticipated. If these circumstances arise the Company would be required to either (i) materially reduce its operating costs, or (ii) obtain financing from another source or raise additional capital through debt or equity financing, in addition to the offering planned for the fourth quarter of 2015. While the Company has been successful in the past in obtaining new financing, there is no assurance that it will be able to raise additional funds in the future.

The Company has used, and will continue to use, a portion of the proceeds from the 2015 Offerings, to reduce its accounts payable which has resulted in the reported cash outflow from operations for the nine months ended September 30, 2015.

The Company has prepared its business plan for 2015, taking into account (i) the proceeds from the 2015 Offerings, (ii) anticipated timing of vendor payments for existing accounts payable and for new solar panels, (iii) anticipated timing for sales and installation of solar energy systems, (iv) anticipated timing of collection of accounts receivable, and (v) its operating cost structure following the implementation of cost improvement actions. The Company’s objectives in preparing this plan included (i) further reducing its fixed operating cost infrastructure, commencing during the first quarter of 2015, in order to reduce the required level of future revenue for profitable operations and (ii) reducing the Company’s present operating losses, with the intention of returning the Company to profitable operations in the future. Elements of this plan include, among others, (i) realizing operating costs savings from reductions in staff, (ii) the positive impact of the strategic decision to exit the large commercial segment which operated at both a substantial cash and operating loss, (iii) moving towards an optimized field and e-sales force, (iv) optimizing the Company’s construction capability through authorized third-party integrators to realize the revenue from installation of the Company’s backlog and minimize the impact on gross margin of idle construction crew time, (v) changing the mix of marketing expenditures to achieve a lower cost of acquisition than that employed in prior periods, and (vi) continuing internal efforts to convert the Company’s accounts receivable to cash more quickly.

The Company believes that by (i) raising additional capital through the 2015 Offerings, and (ii) taking the actions it has already and will continue to implement to reduce its fixed operating cost infrastructure, the Company will have sufficient financial resources to operate for the ensuing twelve months. However, if the Company is unsuccessful in raising additional capital and if planned operational and sales initiatives are not successful in significantly reducing historical loss from operations, which would arise were the Company unsuccessful in its efforts to increase its sales, installations of solar energy systems and resulting revenue or if the Company encounters unplanned operational difficulties, or if the timing of collection of accounts receivable and payments of accounts payable are significantly different than anticipated, the Company may not have sufficient funds to repay any outstanding borrowings as they come due or to fund our operating cash needs for the next twelve months.

The Company had total cash and available borrowings as follows:

(in thousands)	October 30, 2015		September 30, 2015		December 31, 2014
Cash plus availability under current borrowing base	$	886	$	1,090	$	3,001
Cash plus availability under maximum allowed borrowing base	$	3,736	$	3,519	$	3,097