In determining the amount the Company expects to derive from the leased solar systems following the end of the lease term, it used significant assumptions. At lease inception, the Company engaged the services of a third-party to perform a study of the future fair market value through the end of the assumed lease term of 20 years using a cost approach and income approach. Inflation was projected based on historical trends to determine the residual value in real dollars. The Company has managed the risk associated with the residual value of its leased panels by incorporating system, home and property maintenance requirements within each lease. The Company expects to derive approximately $0.3 million from the underlying solar panels following the end of the lease term.

Maturities of lease receivables are as follows:

The components of the Company’s aggregate net investment in sales-type leases as of March 31,June 30, 2019 include lease receivables of $1.5 million, unguaranteed residual assets of $0.3 million, initial direct cost of ($0.08) million, deferred operations and maintenance expense of $0.06 million and unearned revenue of $0.6 million.

4. April 2019 Offering

On April 2, 2019, Company closed an offering and sale of (a) “Primary Units,” each consisting of one share of the Company’s Class A common stock and a Series R Warrant to purchase one share of Class A common stock (the “Series R Warrant”), and (b) “Alternative Units,” each consisting of a Prepaid Series S Warrant to purchase one share of Class A common stock (the “Series S Warrants”) and a Series R Warrant to purchase one share of Class A common stock, pursuant to the Securities Purchase Agreement, dated as of April 2, 2019, by and among the Company and three institutional and accredited investors (the “Investors”) referred to herein as the “April 2019 Offering”. As a result, the Company issued 15,938,280 shares of Class A common stock, Series R Warrants to purchase 17,368,421 shares of Class A common stock, and Series S Warrants to purchase 1,430,141 shares of Class A common stock. The purchase price for a Primary Unit was $0.19 and the purchase price for an Alternative Unit was $0.18.

The Series R Warrant is exercisable at any time after issuance and will remain exercisable for a period of five years thereafter at an exercise price of $.0.20 per share, subject to adjustments for stock splits and similar events. The Series S Warrant is exercisable immediately after issuance and for a period of five years thereafter at an exercise price of $0.19 per share, of which $0.18 was paid at the closing with $0.01 per share payable upon exercise.

The Company received net proceeds of approximately $2.9 million at the closing, after deducting commissions to the placement agents and estimated offering expenses payable by the Company associated with the offering.

In connection with the closing of the offering, the Company paid a cash fee of $231,000 to the placement agent for the offering. The Company also reimbursed $5,000 of the placement agent’s expenses and $35,000 of legal expenses of the placement agent. In addition, the Company issued a warrant to purchase 1,389,474 shares of Class A common stock to the placement agent.

The Series R Warrants have been accounted for in accordance with ASC 480. The Series R Warrants are accounted for as liabilities due to provisions allowing the Investors to request redemption in cash, upon a change of control or failure to timely deliver shares of Class A common stock upon exercise. The Company classifies these common stock warrant liabilities on the Condensed Consolidated Balance Sheet as long-term liabilities due to their maturity in 5 years. The Series R Warrants are revalued at each balance sheet date subsequent to their initial issuance. The Company used a Monte Carlo pricing model to value these warrant liabilities. The Monte Carlo pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requires the Company to develop its own assumptions. See Note 10. Fair Value Measurements for information about the techniques we use to measure the fair value of our Series R Warrants.

The Series S Warrants are derivatives and have been accounted for in accordance with ASC 815. The derivatives do not meet the criteria for equity classification and have been recorded at their fair value on the Condensed Consolidated Balance Sheets as a long-term liability due to their maturity in 5 years. Any changes in the fair value of the conversion options have been recorded as a gain or loss directly on the Condensed Consolidated Statement of Operations. See Note 10. Fair Value Measurements for information about the techniques we use to measure the fair value of our derivative instruments.

The placement agent warrants have been accounted for as non-employee compensation in accordance with ASC 718 upon adoption of ASU 2018-07 which became effective for the Company on January 1, 2019. The warrants were issued to the placement agents for their assistance with the April 2019 Offering and do not meet the requirements for liability classification. Additionally, the placement agent warrants contain a redemption feature which is not solely within the control of the Company resulting in temporary equity presentation on the Condensed Consolidated Balance Sheet as of June 30, 2019. They have been reflected at their grant date fair value and will be reassessed if it becomes probable that the warrants will be redeemable.

5. Inventory

Inventory for our Solar Division consists primarily of solar energy system components (such as solar panels and inverters) and its cost is determined by the first-in, first-out ("FIFO") method. The inventory is stated at the lower of cost or net realizable value with an allowance for slow moving and obsolete inventory items based on an estimate of the markdown to the retail price required to sell or dispose of such items. The Company has an allowance for obsolete or slow-moving inventory of $0.5 million and $0.7 million at March 31,June 30, 2019 and December 31, 2018, respectively.

POWERHOUSE™ inventories are recorded at lower of cost (incurred from third party supply channel manufacturers)(FIFO) or net realizable value. Cost is determined using the FIFO method. Management will establish an estimated excess and obsolete inventory reserve based on slow-moving and obsolete inventory. As of March 31,June 30, 2019, and December 31, 2018, there was no excess and obsolete inventory reserve.reserve for POWERHOUSE™ inventories.

5.6. Accrued Liabilities

Accrued liabilities consist of the following:

6.7. Related Parties

On May 23, 2017, the Company entered into an agreement with Mobomo, LLC (“Mobomo”) for the design and development of intellectual property at a cost of $0.5 million. The intellectual property consisted of an integrated mobile phone application and the new RGS 365™ customer portal. As of March 31,June 30, 2019, and December 31, 2018, Mobomo provided data hosting services which totaled approximately $4,000$5,000 and $20,000, respectively.

Mobomo’s Chief Executive Officer Brian Lacey is the son of the Company’s CEO Dennis Lacey.CEO. The Company approved the agreement in accordance with its related-party transaction policy.

7.8. Contingencies

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 a liability for probable and estimable costs incurred with respect to identified risks and uncertainties based upon the facts and circumstances currently available.

8.9. Shareholders’ Equity

During the three and six months ended June 30, 2018, the Company issued stock options under the 2018 Long-Term Incentive Plan, however, none of these options were exercised during the three and six months ended June 30, 2019. During the three months ended June 30, 2019, 215,500 stock options were granted.

Related specifically to the Company’s issuance of convertible notes and warrants on April 9, 2018, the Company issued 894,836 shares of its Class A common stock upon the conversion of the 2018 convertible notes and 210,000 shares of its Class A common stock upon exercise of the Series Q warrants during the six months ended June 30, 2019. No such conversions or exercises took place during the three months ended June 30, 2019.

As discussed in Note 4. April 2019 Offering, the Company issued the Series R Warrants, Series S Warrants and placement agent warrants. Of the warrants issued, 1,430,141 shares of Class A common stock were issued upon exercise of the Series S warrants and 3,688,935 shares of Class A common stock were issued upon exercise of the Series R warrants during the three months ended June 30, 2019.

At June 30, 2019, the Company had the following shares of Class A common stock reserved for future issuance:

10. Fair Value Measurements

The Company complies with the provisions of FASB ASC No. 820,Fair Value Measurements and Disclosures(“ASC 820”), in measuring fair value and in disclosing fair value measurements at the measurement date. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. FASB ASC No. 820-10-35, Fair Value Measurements and Disclosures- Subsequent Measurement (“ASC 820-10-35”), clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10-35-3 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.

ASC 820-10-35 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1 Inputs – Level 1 inputs are unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value. An active market is a market in which transactions occur for the item to be fair valued with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 Inputs – Level 2 inputs are inputs other than quoted prices included within Level 1. Level 2 inputs are observable either directly or indirectly. These inputs include: (a) Quoted prices for similar assets or liabilities in active markets; (b) Quoted prices for identical or similar assets or liabilities in markets that are not active, such as when there are few transactions for the asset or liability, the prices are not current, price quotations vary substantially over time or in which little information is released publicly; (c) Inputs other than quoted prices that are observable for the asset or liability; and

(d) Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs – Level 3 inputs are unobservable inputs for an asset or liability. These inputs should be used to determine fair value only when observable inputs are not available. Unobservable inputs should be developed based on the best information available in the circumstances, which might include internally generated data and assumptions being used to price the asset or liability.

When determining the fair value measurements for assets or liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.

The following tables present the fair values of derivative instruments included in our consolidated balance sheets as of March 31, 2019 and December 31, 2018 (in thousands) respectively:

Fair Value of Derivative Instruments

The Effect of Derivative Instrument on the Statement of Operations

for the Three Months Ended March 31, 2019 and 2018

The Company accounts for Series Q warrantsR Warrants in accordance with ASC 480. The Series Q warrantsR Warrants are accounted for as liabilities due to provisions in the warrants allowing the warrant holdersInvestors to request redemption in cash upon a change of control andor failure to timely deliver shares of Class A common stock upon exercise or default.exercise. The Company classifies these warrant liabilities on the Consolidated Balance Sheet as long-term liabilities, which are revalued at each balance sheet date subsequent to their initial issuance. The Company used a Black ScholesMonte Carlo pricing model to initially value the Series R Warrants however, due to the immaterial difference in valuations between the two models, the Company utilized Black Scholes as of June 30, 2019 to value these common stock warrant liabilities which is based, in part, upon unobservable inputs some of which have little or no market data, requiring the Company to develop its own assumptions. The following tables summarize the basis used to measure certain financial assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:

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 March 31,June 30, 2019:

2018 Notes Derivative Liability

The Company’s Senior Convertible Notes issued on April 9, 2018 (“2018 Notes”) had a maturity date of April 9, 2019. As such, the Company made the assumption that as of the period ended March 31, 2019, noteholders most likely would not convert the remaining notes. Additionally, information available to the Company after period end supported this assumption and the conversion option derivative liability was determined to have a value of $0 as of March 31, 2019.

Common Stock Warrants

The fair value of Series Q Warrants was derived using a Black Scholes pricing model, which is based, in part, upon unobservable inputs for which there is little or no market data, requiring the Company to develop its own assumptions. The Series Q Warrants had previously been valued using the Monte Carlo model however, due to the immaterial difference in valuations between the two models, the Company utilized Black Scholes. The assumptions used in the Black Scholes model were as follows:

Other Financial Instruments

The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, deferred revenue and convertible debt. The carrying values of these financial instruments approximate their fair values, due to their short-term nature.

9.11. Segment Information

Financial information for the Company’s segments and a reconciliation of the total of the reportable segments’ income (loss) from operations (measures of profit or loss) to the Company’s consolidated net loss are as follows:

The following is a reconciliation of reportable segments’ assets to the Company’s consolidated total assets. The Other segment includes certain unallocated corporate amounts.

10. Subsequent Events

On April 4, 2019, the Company closed a registered offering in which it issued and sold (i) 15,938,280 shares of Class A common stock, (ii) prepaid Series S Warrants to purchase 1,430,141 shares of Class A common stock and (iii) Series R Warrants to purchase 17,368,421 shares of Class A common stock pursuant to the terms of the Securities Purchase Agreement dated April 2, 2019 between the Company and the investors. The investors paid $0.19 per share of Class A common stock and $0.18 per share of Class A common stock underlying the Series S Warrant for aggregate gross proceeds of $3.3 million at the closing and before $0.34 million of expenses.

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 operations 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 2018 10-K, and in this reportour Quarterly Report on Form 10-Q for the period ended March 31, 2019.2019 and this report.

Overview

For the last 40 years, we have been a residential and small business commercial solar EPC company. We offer turnkey services, including design, procurement, permitting, build-out, grid connection, financing referrals and warranty and customer satisfaction activities. Our solar energy systems use high- quality solar photovoltaic modules. We use proven technologies and techniques to help customers achieve meaningful savings by reducing their utility costs. In addition, we help customers lower their reliance upon fossil fuel energy sources.

As of September 29, 2017, we are the exclusive domestic and international licensee of the POWERHOUSE™ in-roof solar shingle, an innovative and aesthetically pleasing solar shingle system developed by Dow. During 2018, we received UL certification for POWERHOUSE™ 3.0 and manufactured our initial solar shingles during December 2018. We anticipate that in the future, the majority of our revenue will arise from sales of POWERHOUSE™ in-roof solar shingles to local roofing companies, solar installers and homebuilders.

We, including our predecessors, have more than 40 years of experience in residential solar energy and trace our roots to 1978, when Real Goods Trading Corporation sold the first solar photovoltaic panels in the United States. We have designed and installed over 26,000 residential and commercial solar energy systems since our founding.

We operate as three reportable segments: (1) Solar Division – the installation of solar energy systems for homeowners, including lease financing thereof, and small business commercial in the United States; (2) POWERHOUSE™ - the manufacturing and sales of solar shingles; and (3) Other – corporate operations. On March 27, 2019, our Board of Directors determineddecided to exit our mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with the goal of maximizing future shareholder value. We believe this structure and realignment enables us to effectively manage our operations and resources.

As an EPC company, we generally recognize revenue from solar energy systems sold to our customers when we install the solar energy system. Our business requires that we incur costs of acquiring solar panels and labor to install solar energy systems on our customer rooftops up-front and receive cash from customers thereafter. As a result, during periods when we are increasing sales, we expect to have negative cash flow from operations.

As manufacturer of POWERHOUSE™, we will recognize revenue upon transfer of control to the customer. During 2018, we established a supply chain to manufacture POWERHOUSE™. We also began building a nationwide network of local roofers and solar installers. We received our first purchase order from a customer on December 27, 2018 and shipped to the customer in January 2019.

POWERHOUSE™ License

A material significant event occurred onOn September 29, 2017, when we executed the License with Dow, providing us an exclusive domestic and international right to commercialize the POWERHOUSE™ in-roof solar shingle, an innovative and aesthetically pleasing solar shingle system developed by Dow. The POWERHOUSE™ 1.0 and 2.0 versions used CIGS (copper indium gallium selenide solar cells) technology which had a high manufacturing cost, resulting in the product not being consumer price friendly. Conversely, the POWERHOUSE™ 3.0 version was developed with traditional silicon solar cells to increase solar production and to provide a competitive consumer price point.

In addition to the License, we executed a Trademark License Agreement (the “TLA”), a Technology Service Agreement and a Sales Agreement- Surplus Property with Dow. The execution of the TLA allows us to market the POWERHOUSE™ 3.0 product using the Dow name.

Under the terms of the License, we will produce, market and sell POWERHOUSE™ 3.0, for which we paid a license fee of $3 million along withand thereafter a royalty fee equal to 2.5% against net sales of the POWERHOUSE™ product and services, payable quarterly in arrears. Further, we were responsible for all costs to obtain UL certification and we are responsible for the prosecution of all related patents world-wide, which may be offset against the payment of the royalty fee. During December 2018, we began commercialization of POWERHOUSE™ 3.0 entailing the manufacturing, marketing and sale of POWERHOUSE™ 3.0 to roofing companies.companies and homebuilders.

As of March 31,June 30, 2019, we have invested approximately $3.2 million that has been capitalized to the POWERHOUSE™ License, an intangible asset on the Consolidated Balance Sheet.

Key Metrics

Key operational metric, gross margin on residential segment, currently 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. Cost of goods sold (“COGS”) include direct project installation costs (materials, labor, travel, financing fees, and estimated warranty costs) and indirect costs for project installation support (including un-utilized labor of idle time of construction crews, supplies, and insurance). We employ an internal time reporting system to determine COGS and resulting gross margin percentage used by us to measure our performance in achieving gross margin percentage targets. Further, we measure COGS per watt based upon COGS, excluding idle time, divided by the aggregate watts of systems installed during the period. For financial reporting purposes, COGS include the idle time of construction crews.crews and indirect costs. Gross margin percentage on actual installation time is not a measure defined by generally accepted accounting principles.

The majorityFor the three months ended June 30, 2018, the Company employed its own installation crews as compared to the Company utilizing authorized integrators during the three months ended June 30, 2019, a decision made by management as it relates to the installation of indirect labor costs are fixed, which impactsbacklog on a go forward basis after the gross margin percentage when we considerreduction of headcount at the end of March 2019. While the utilization of authorized integrators is more costly than our own installation crews, it is offset by reducing staff idle time. Additionally, we utilized a third party to sell excess or obsolete inventory which was excluded from the gross margin percentage below. The decrease in gross margin quarter-over-quarter, shown below is due to the impact of theseindirect fixed costs spread across lesser installation revenue.

Backlog

Backlog representsRepresents the dollar amount of revenue that we may recognizebe recognized in the future from signed contracts to install solar energy systems that have not yet been installed without taking into account possible future cancellations. Backlog is not a measure defined by GAAPgenerally accepted accounting principles and is not a measure of contract profitability. Our methodology for determining backlog may not be comparable to methodologies used by other companies in determining their backlog amounts. The backlog amounts we disclosedisclosed are net of cancellations received and include anticipated revenues associated with (i) the original contract amounts, and (ii) change orders for which we have received written confirmations from the applicable customers.have been received. Backlog may not be indicative of future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers. Due to the exit from our mainland residential business, we do not expect to enter into new contracts to install residential solar energy systems in the mainland and will focus on converting existing backlog as of March 31, 2019 into sales. We can provide no assurance as to the profitability of our contracts reflected in backlog.results.

The following table summarizes changes to our backlog for the Solar Division and POWERHOUSE™ during the three-monthsix-month period ended March 31,June 30, 2019:

Critical Accounting Policies and Estimates

There were no material changes to our critical accounting policies or estimates during the threesix months ended March 31,June 30, 2019 from those disclosed in our 2018 10-K. The adoption of ASC 842 related to leases has not had a material impact on our results of operation, financial condition or cash flows.

Results of Operations

Three Months Ended March 31,June 30, 2019 Compared to Three Months Ended June 30, 2018

Contract revenue:

Sale and installation of solar energy systems.. Sale and installation of solar energy system revenue decreased by $0.9$1.5 million, or 38%45%, to $1.6$1.9 million during the three months ended March 31,June 30, 2019, from $2.5$3.4 million during the three months ended March 31,June 30, 2018. ThisThe decrease in revenue was primarily duereflects management’s decision to inclement weather restricting our ability to access rooftopsexit the mainland residential solar business and incentive delays.install only its existing backlog.

Contract expenses:

Installation of solar energy systems.. Installation of solar energy system expenses decreased $0.9$1.2 million, or 32.9%40%, to $1.9$1.8 million during the three months ended March 31,June 30, 2019, from $2.8$3.0 million during the three months ended March 31,June 30, 2018. The reduction of contract expenses reflects the lower revenue for the three months ended March 31,June 30, 2019 as compared to the same period in 2018.

Customer acquisition: Customer acquisition expense decreased $0.3 million during the three months ended June 30, 2019, or 38%, to $0.5 million from $0.8 million during the three months ended June 30, 2018. The decrease in customer acquisition resulted from management’s decision to exit the mainland residential solar business.

Operating Expenses.Expenses: Operating expenses for the three months ended March 31,June 30, 2019 was $3.0$2.6 million compared to $2.7$2.3 million during the three months ended March 31,June 30, 2018, an increase of $0.3 million, or 12.7%13%, primarily due to expansion of thePOWERHOUSE™ operations team over the previous 12-month period.

Goodwill Impairment: As of June 30, 2018, we concluded that the fair value of goodwill no longer exceeded its carrying value and wrote off the goodwill balance.

Change in fair value of derivative liabilities, loss on debt extinguishment and amortization of debt discount & deferred loan costs: During the three months ended June 30, 2018, the issuance of the 2018 convertible notes, subsequent conversions and revaluation of the derivative liabilities resulted in a net loss of $3.1 million. Additionally, interest expense increased $1.4 million due to the accretion of the debt discount and deferred loan costs related to the 2018 convertible notes. During the three months ended June 30, 2019 we recorded a net loss of $1.5 million related to the change in fair value of derivative liabilities associated with warrants issued with the April 2019 Offering.

Other (income) expense:During the quarter ended June 30, 2018, the Company recorded a gain from settlement of a long-term insurance liability.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

Contract revenue:

Sale and installation of solar energy systems.Sale and installation of solar energy system revenue decreased $2.5 million, or 42%, to $3.4 million during the six months ended June 30, 2019, from $5.9 million during the six months ended June 30, 2018. The decrease in revenue resulted from management’s decision to exit the mainland residential solar business and install only its existing backlog.

Contract expenses:

Installation of solar energy systems.Installation of solar energy system expenses decreased $2.1 million, or 36%, to $3.7 million during the three months ended June 30, 2019, from $5.8 million during the three months ended June 30, 2018, which corresponds to the reduction of installation revenue during this same time comparison.

Customer acquisition: Customer acquisition expense decreased $0.4 million during the six months ended June 30, 2019, or 20%, to $1.6 million from $2.0 million during the six months ended June 30, 2018. The decrease in customer acquisition resulted from management’s decision to exit the mainland residential solar business.

Operating expense: Operating expenses increased $0.8 million, or 16%, to $5.7 million during the six months ended June 30, 2019 compared to $4.9 million during the six months ended June 30, 2018, primarily due to expansion of POWERHOUSE™ operations over the previous 12-month period.

Change in fair value of derivative liabilities, loss on debt extinguishment and amortization of debt discount & deferred loan costs: During the six months ended June 30, 2018, the issuance of the 2018 convertible notes, subsequent conversions and revaluation of the derivative liabilities resulted in a net loss of $3.1 million. Additionally, interest expense increased $1.4 million due to the accretion of the debt discount and deferred loan costs related to the 2018 convertible notes. During the three months ended June 30, 2019 we recorded a net loss of $1.4 million related to the change in fair value of derivative liabilities associated with warrants issued with the April 2019 Offering.

Other (income) expenses: During the quarter ended June 30, 2018, the Company recorded a gain from settlement of a long-term insurance liability.

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. Further, we have historically experienced seasonality in our sales of solar systems, with the fourth and first quarters of the year seeing less sales orders than the second and third quarters.

As we have just begun to market POWERHOUSE™ in-roof shingles, we do not have historical experience to assess seasonality for this line of business.

Liquidity and Financial Resources Update

Our historical operating results indicate substantial doubt exists related to our ability to continue as a going concern. Management’s plans and actions, which are intended to mitigate the substantial doubt raised by our historical operating results in order to satisfy our estimated liquidity needs for a period of 12 months from the issuance of the consolidated financial statements, are discussed below. As we cannot predict, with certainty, the outcome of our actions to generate liquidity, or whether such actions would generate the expected liquidity as currently planned, management’s plans to mitigate the risk and extend cash resources through the evaluation period, are not considered probable under current accounting standards for assessing an entity’s ability to continue as a going concern.

On March 27, 2019, the Company’s Board of Directors determineddecided to exit its mainland residential solar business to focus on the POWERHOUSE™ in-roof shingle market and reduce overall cash outflow, with the goal of maximizing future shareholder value. The Company believes this structure and realignment enables it to effectively manage its operations and resources. This realignment is expected to resultresulted in the reduction of workforce payroll plus burden of approximately $4.0 million annually.

As of March 31,June 30, 2019, we havehad cash of $2.1$1.7 million, working capital of $2.2$2.6 million and shareholders’ equity of $7.1$3.6 million.

We have experienced recurring operating losses and negative cash flow from operations which have necessitated:

No assurances can be given that we will be successful with our plans to grow revenue for profitable operations.

We have historically incurred a cash outflow from our operations as our revenue has not been at a level for profitable operations. As discussed above, a key component of our revenue growth strategy is the sale of our POWERHOUSE™ 3.0 in-roof solar shingle. We obtained UL certification for POWERHOUSE™ at the close of 2018 and therefore only recently begunbegan to market POWERHOUSE™ at the start of 2019. We believe that we will require several quarters for us to generate sales to meet our goals for profitable operations.

The first quarter of the year has always been one of our slowest sales periods and as such, this is a period of higher cash outflow. POWERHOUSE™ 3.0 sales during the first quarter of 2019 have been materially less than our expectations and, accordingly, we raised additional capital during the second quarter of 2019.

Additionally, we have arranged with a third-party specialty lender to provide financing to our POWERHOUSE™ roofers for their purchases of POWERHOUSE™ in-roof shingles. Under this agreement, we are to be paid the next day after the roofers place a purchase order and, accordingly, when roofers avail themselves of this financing, we do not have accounts receivable, enhancing our cash flow from operations.

As discussed above, (i) we expect that future sales of POWERHOUSE™ 3.0 in-roof solar shingles will be our primary source of revenue and (ii) we only recently began marketing POWERHOUSE™ 3.0, and accordingly, we expect to incur a quarterly cash outflow for a portion of 2019. We have placed purchase orders with our supply chain partners for inventory to be converted to revenue.

The Company has prepared its business plan for the ensuing twelve months, which includes the following:

We may have access to cash from exercises of outstanding Class A common stock. The maximum cash from exercises of outstanding Class A common stock warrants is the mathematical result of the number of warrant shares times the respective exercise price per share. The majority of these Class A common stock warrants have exercise prices at or below $3.10 per share and would result in cash receipts of $21.4 million if all investors elect cash exercises (not cashless exercises). No assurances can be given that the investors will exercise their remaining Class A common stock warrants.

We believe we have arranged for the capital to commercialize POWERHOUSE™ 3.0. No assurances can be given that we will successfully commercialize POWERHOUSE™ 3.0.

Cash Flows

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

Operating activities. Our operating activities used net cash of $3.7$7.6 million and $2.5$5.8 million during the threesix months ended March 31,June 30, 2019 and 2018, respectively. Our increase in cash used in operations of $1.2$1.8 million was primarily attributable to an increase in manufactured POWERHOUSE™ inventory of approximately $1.3$1.5 million.

Investing activities. Cash used in investing activities during the threesix months ended March 31,June 30, 2019 and 2018, were immaterial.

Financing activities. We raised net cash of approximately $3.0 million from the issuance of securities related to the April 2019 Offering during the six months ended June 30, 2019, as compared $6.3 million during the six months ended June 30, 2018 from (i) $4.5 million from the issuance of the 2018 convertible notes, (ii) $1.7 million from the issuance of securities duringon January 4, 2018, and (iii) $0.1 million from the three months ended March 31, 2018.issuance of Class A commons stock upon exercise of warrants.

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 SEC, 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 listed in the section entitled “RISK FACTORS” in our 2018 10-K, which is on file with the SEC. 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.

Not applicable.

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon their evaluation as of March 31,June 30, 2019, they have concluded that those disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2019, we implemented controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new lease accounting standard on our financial statements to facilitate the adoption of the standard on January 1, 2019. There were no other changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended March 31,June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

From time to time, the Company may be involved in legal proceedings that are considered to be in the normal course of business. There were no material developments to previously reported legal proceedings during the three months ended March 31,June 30, 2019.

ThereWe do not have been no material changesa sufficient number of authorized shares of Class A common stock for a future capital raise of Class A common stock or securities convertible into or exercisable for Class A common stock.

In the past, we have raised capital by issuing shares of Class A common stock or securities convertible into or exercisable for Class A common stock, or a combination thereof. We may need to raise additional capital in the future. As ofAugust 8, 2019, we have approximately 12 million available shares of Class A common stock (after taking into account shares of Class A common stock reserved for issuance, for example, under outstanding warrants). At our June 2019 annual shareholders’ meeting, we requested that our shareholders approve an amendment to our articles of incorporation to increase the authorized number of shares of Class A common stock from 150,000,000 to 250,000,000.  Our shareholders did not approve the risk factors disclosedamendment and, accordingly, we do not believe we have a sufficient number of shares of Class A common stock authorized to raise a meaningful amount of capital through an offering of Class A common stock or securities convertible into or exercisable for Class A common stock in Item 1Athe future. We only recently began the nationwide commercialization of POWERHOUSE™ 3.0, and, accordingly, we expect to incur a quarterly cash outflow for a portion of 2019. In the Company’s 2018 10-K.event that we have insufficient capital to cover our operating expenses, including the commercialization of POWERHOUSE™ 3.0, we would evaluate further cost-reduction measures, sale of assets, seeking capital from issuance of our other authorized classes of securities, and seeking capital from Class A common stock warrant exercises by reducing the exercise price of Class A common stock warrants to induce conversion. No assurances can be given that we will be successful in doing so.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.