Table of Contents
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
Commission File Number 001-34044
REAL GOODS SOLAR, INC.
(Exact name of registrant as specified in its charter)
COLORADO | 26-1851813 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
833 W. SOUTH BOULDER ROAD
LOUISVILLE, COLORADO 80027-2452
(Address of principal executive offices)
(303) 222-8400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES ¨ NO x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x | |||
( Do not check if a smaller reporting company ) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class | Outstanding at August 12, 2008 | |
Class A Common Stock ($.0001 par value) | 13,637,739 | |
Class B Common Stock ($.0001 par value) | 2,153,293 |
Table of Contents
REAL GOODS SOLAR, INC.
FORM 10-Q
1
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements that involve risks and uncertainties. When used in discussion, the words “anticipate,” “believe,” “plan,” “estimate,” “expect,” “strive,” “future,” “intend” and similar expressions as they relate to us are intended to identify such forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures about Market Risk”, “Risk Factors” and elsewhere in this report. Risks and uncertainties that could cause actual results to differ include, without limitation, general economic conditions, competition, loss of key personnel, pricing, brand reputation, consumer trends, acquisitions, new initiatives undertaken by us, security and information systems, legal liability for website content, merchandise supply problems, failure of third parties to provide adequate service, our reliance on centralized customer service, overstocks and merchandise returns, our reliance on a centralized fulfillment center, increases in postage and shipping costs, E-commerce trends, future Internet related taxes, our majority shareholders’ control of us, fluctuations in quarterly operating results, customer interest in our products, the effect of government regulation and other risks and uncertainties included in our filings with the Securities and Exchange Commission. We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward-looking statements which reflect our view only as of the date of this report. We undertake no obligation to update any forward-looking information.
Item 1. | Financial Statements (Unaudited) |
Unaudited Interim Condensed Consolidated Financial Statements
We have prepared our unaudited interim condensed consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to these rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, the unaudited interim condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly, in all material respects, our consolidated financial position as of June 30, 2008, the interim results of operations for the three and six months ended June 30, 2008 and 2007, and cash flows for the six months ended June 30, 2008 and 2007. These interim statements have not been audited. The balance sheet as of December 31, 2007 was derived from our audited consolidated financial statements included in our Registration Statement on Form S-1 (Registration No. 333-149092), which was declared effective May 7, 2008. The interim condensed consolidated financial statements contained herein should be read in conjunction with our audited financial statements, including the notes thereto, for the year ended December 31, 2007.
2
Table of Contents
Condensed consolidated balance sheets
(in thousands, except share and per share data) | June 30, 2008 | December 31, 2007 | ||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 25,629 | $ | 542 | ||||
Accounts receivable, net | 4,911 | 3,632 | ||||||
Inventory | 3,518 | 2,454 | ||||||
Deferred costs on uncompleted contracts | 916 | 992 | ||||||
Deferred advertising costs | 322 | 277 | ||||||
Deferred tax assets | — | 154 | ||||||
Receivable from Gaiam | 998 | — | ||||||
Other current assets | 488 | 19 | ||||||
Total current assets | 36,782 | 8,070 | ||||||
Property and equipment, net | 4,443 | 4,382 | ||||||
Goodwill and other intangibles, net | 10,476 | 6,094 | ||||||
Deferred tax assets | — | 2,324 | ||||||
Other assets | 30 | 116 | ||||||
Total assets | $ | 51,731 | $ | 20,986 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,983 | $ | 1,275 | ||||
Accrued liabilities | 137 | 421 | ||||||
Deferred revenue on uncompleted contracts | 351 | 1,354 | ||||||
Deferred tax liability | 106 | — | ||||||
Payable to Gaiam | — | 16,286 | ||||||
Total current liabilities | 2,577 | 19,336 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Class A common stock, $.0001 par value, 150,000,000 shares authorized, 13,637,739 shares and no shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively | 1 | — | ||||||
Class B common stock, $.0001 par value, 50,000,000 shares authorized, 2,153,293 shares and no shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively | — | — | ||||||
Additional paid-in capital | 49,986 | 2,150 | ||||||
Accumulated deficit | (833 | ) | (500 | ) | ||||
Total shareholders’ equity | 49,154 | 1,650 | ||||||
Total liabilities and shareholders’ equity | $ | 51,731 | $ | 20,986 | ||||
See accompanying notes to the interim condensed consolidated financial statements.
3
Table of Contents
Condensed consolidated statements of operations
(in thousands, except per share data) | For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||
(unaudited) | (unaudited) | |||||||||||||
Net revenue | $ | 8,841 | $ | 4,514 | $ | 15,409 | $ | 8,878 | ||||||
Cost of goods sold | 6,203 | 2,751 | 10,934 | 5,627 | ||||||||||
Gross profit | 2,638 | 1,763 | 4,475 | 3,251 | ||||||||||
Expenses: | ||||||||||||||
Selling and operating | 2,459 | 1,435 | 4,515 | 2,764 | ||||||||||
General and administrative | 311 | 53 | 581 | 140 | ||||||||||
Total expenses | 2,770 | 1,488 | 5,096 | 2,904 | ||||||||||
Income (loss) from operations | (132 | ) | 275 | (621 | ) | 347 | ||||||||
Interest income | 84 | — | 84 | — | ||||||||||
Income (loss) before income taxes and minority interest | (48 | ) | 275 | (537 | ) | 347 | ||||||||
Income tax expense (benefit) | (17 | ) | 124 | (209 | ) | 156 | ||||||||
Minority interest in net (income) loss of consolidated subsidiaries, net of tax | 4 | — | (5 | ) | — | |||||||||
Net income (loss) | $ | (27 | ) | $ | 151 | $ | (333 | ) | $ | 191 | ||||
Net income (loss) per share: | ||||||||||||||
Basic | $ | 0.00 | $ | 0.02 | $ | (0.03 | ) | $ | 0.02 | |||||
Diluted | $ | 0.00 | $ | 0.02 | $ | (0.03 | ) | $ | 0.02 | |||||
Shares used in computing net income (loss) per share: | ||||||||||||||
Basic | 13,085 | 10,000 | 11,551 | 10,000 | ||||||||||
Diluted | 13,085 | 10,000 | 11,551 | 10,000 | ||||||||||
See accompanying notes to the interim condensed consolidated financial statements.
4
Table of Contents
Condensed consolidated statements of cash flows
For the Six Months Ended June 30, | ||||||||
(in thousands) | 2008 | 2007 | ||||||
(unaudited) | ||||||||
Operating activities | ||||||||
Net income (loss) | $ | (333 | ) | $ | 191 | |||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
Depreciation | 92 | 40 | ||||||
Amortization | 59 | — | ||||||
Minority interest in a consolidated subsidiary | 5 | — | ||||||
Deferred income tax expense | 132 | 158 | ||||||
Share-based compensation expense | 34 | — | ||||||
Changes in operating assets and liabilities, net of effects from acquisitions: | ||||||||
Accounts receivable, net | (1,279 | ) | 513 | |||||
Inventory | 196 | 120 | ||||||
Deferred costs on uncompleted contracts and advertising | 223 | 238 | ||||||
Other current assets | (204 | ) | — | |||||
Accounts payable | (191 | ) | (43 | ) | ||||
Accrued liabilities and deferred revenue on uncompleted contracts | (1,530 | ) | (372 | ) | ||||
Net cash (used in) provided by operating activities | (2,796 | ) | 845 | |||||
Investing activities | ||||||||
Purchase of property and equipment | (78 | ) | (7 | ) | ||||
Purchase of business, net of proceeds from sale of minority interest | (2,910 | ) | — | |||||
Net cash used in investing activities | (2,988 | ) | (7 | ) | ||||
Financing activities | ||||||||
Proceeds from IPO, net | 48,154 | — | ||||||
Repayment of borrowings from Gaiam, net | (17,283 | ) | (769 | ) | ||||
Net cash provided by (used in) financing activities | 30,871 | (769 | ) | |||||
Net change in cash and cash equivalents | 25,087 | 69 | ||||||
Cash and cash equivalents at beginning of period | 542 | 248 | ||||||
Cash and cash equivalents at end of period | $ | 25,629 | $ | 317 | ||||
Supplemental cash flow information | ||||||||
Common stock issued for acquisitions | $ | 1,876 | $ | — |
See accompanying notes to the interim condensed consolidated financial statements
5
Table of Contents
Notes to interim condensed consolidated financial statements
1. | Organization, Nature of Operations, and Principles of Consolidation |
We are a leading residential solar energy integrator. We were incorporated in Colorado on January 29, 2008 under the name Real Goods Solar, Inc. (“Real Goods”, “we”, “us”, or “our”). As of June 30, 2008 we were 63.3% owned by Gaiam, Inc. (“Gaiam”). Our initial public offering of common stock occurred on May 7, 2008. The accompanying unaudited interim condensed consolidated financial statements represent the solar energy business of Gaiam and its subsidiaries as though the transfer of such business and the related net assets occurred on January 1, 2007.
Until our initial public offering, we were not operating as a separate business within Gaiam. Accordingly, the unaudited interim condensed consolidated financial statements have been prepared on a “carve-out” basis. The unaudited interim condensed consolidated financial statements have been prepared in accordance with Regulation S-X, Article 3,General instructions to financial statements, and Staff Accounting Bulletin Topic 1-B1,Costs reflected in historical financial statements (“SAB 1-B1”). The accompanying unaudited interim condensed consolidated financial statements include allocations of certain Gaiam expenses, including costs of fulfillment, customer service, financial, and other administrative services. The expense allocations have been determined on bases that Gaiam and we consider to be reasonable reflections of the utilization of services provided or the benefits received by us.
The unaudited interim condensed consolidated financial statements include the accounts of Real Goods and its majority-owned or otherwise controlled subsidiaries. We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP, and they include our accounts and those of our subsidiaries. Intercompany transactions and balances have been eliminated. Minority interests in operations of consolidated subsidiaries represents the minority holders’ percentage share of income or losses from the subsidiaries in which we hold a majority, but less than 100 percent, ownership interest and consolidate the subsidiaries’ results in our unaudited interim condensed consolidated financial statements. We have included the results of operations of acquired companies from the effective date of acquisition.
The unaudited condensed consolidated financial position, results of operations and cash flows for the interim periods disclosed in this report are not necessarily indicative of future financial results.
2. | Significant Accounting Policies |
No changes were made to our significant accounting policies during the three and six months ended June 30, 2008, except for the adoption of Financial Accounting Standards Board, or FASB, Statement No. 157,Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The implementation of SFAS 157 did not have a material impact on our unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2008.
Use of Estimates and Reclassifications
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and disclosures. Although we base these estimates on our best knowledge of current events and actions that we may undertake in the future, actual results may be different from the estimates.
Recently Issued Accounting Pronouncements
On March 19, 2008, the FASB issued FASB Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement 133. SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedge items are accounted for under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, SFAS 161 requires:
• | disclosure of the objectives for using derivative instruments in terms of underlying risk and accounting designation; |
• | disclosure of the fair values of derivative instruments and their gains and losses in a tabular format; |
• | disclosure of information about credit-risk-related contingent features; and |
• | cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed. |
SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Early adoption is encouraged. We will adopt the provisions of SFAS 161 in our fiscal year commencing January 1, 2009. We currently believe that adoption of the provisions of SFAS 161 will not have a material impact on our consolidated financial statements.
6
Table of Contents
3. | Shareholders’ Equity and Warrants |
During the second quarter of 2008, we consummated our initial public offering of 5.5 million shares of our Class A common stock which we sold at $10 per share for total net offering proceeds of $48.2 million after underwriters commissions and offering expenses. We also issued 280,000 shares valued at $1.9 million to acquire a minority interest in one of our subsidiaries (see Note 6, Mergers and Acquisitions) and agreed to issue 11,032 other shares valued at $77,000 to our directors for their services.
Additionally, upon consummation of our initial public offering on May 13, 2008, we ceased to be a member of Gaiam’s consolidated group for federal income tax purposes and to the extent we become entitled to utilize loss carryforwards from our separate tax returns, we will distribute to Gaiam the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. Accordingly, we recognized a valuation allowance of $2.5 million against all of our tax loss carryforwards as of the effective date of the tax sharing agreement. The valuation allowance charge, which did not require tax affecting, is reported in our additional paid-in capital on our condensed consolidated balance sheet as of June 30, 2008.
As part of the contingent consideration for the acquisition of Carlson Solar, Inc., on January 1, 2008 we issued seven-year warrants to purchase 30,000 shares of our Class A common stock at an exercise price of $3.20 per share. On November 1, 2007, as part of the contingent consideration for the acquisition of Marin Solar, we issued seven-year warrants to purchase 40,000 shares of our Class A common stock at an exercise price of $3.20 per share. See Note 6, Mergers and Acquisitions.
On March 21, 2008, Gaiam converted 7,846,707 shares of our Class B common stock into Class A common stock.
4. | Share-Based Payments |
During the first half of 2008, we granted 212,000 stock options and cancelled 4,000 stock options under the Real Goods 2008 Long-Term Incentive Plan. Some of the stock options vest 2% per month commencing on the eleventh month following date of grant and the remainder commence vesting 2% over 50 months only upon the attainment of a certain amount of pre-tax income for the year ended December 31, 2008. For the performance based stock options it was not probable that the performance condition would be achieved; therefore, no compensation expense for those grants was recorded.
In 2007, our predecessor granted stock options at $0.20 per share that we assumed on January 31, 2008 at an exercise price of $3.20 per share. The options assumed are for our Class A common stock and have a total cost of $0.5 million. These options vested 50% on May 13, 2008 when our initial public offering was consummated (see Note 3, Shareholders’ Equity) and this vested portion was recorded as an offering expense. The remaining options vest 2% each month after May 2008. Compensation expense was $34,000 for the three and six months ended June 30, 2008 and none for 2007, and is reported in general and administrative expenses on our condensed consolidated statements of operations.
5. | Net Income (Loss) Per Share |
In accordance with SFAS No. 128,Earnings Per Share, we compute net income (loss) per share by dividing the net income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if options and warrants to acquire shares of our Class A common stock were exercised. Common share equivalents of 582,000 shares have been omitted from net income (loss) per share for the three and six months ended June 30, 2008, as they are anti-dilutive. Net income (loss) per share is calculated as if the 10,000,000 shares of Class B common stock, which were issued by us to Gaiam on January 29, 2008, were issued on January 1, 2007.
6. | Mergers and Acquisitions |
On January 1, 2008, our Real Goods Carlson Inc. subsidiary acquired certain assets of and assumed certain liabilities from Carlson Solar for $3.2 million in cash, plus direct acquisition costs of approximately $0.2 million. Simultaneously, on the same date, we sold 11.6% of our Real Goods Carlson Inc. subsidiary for $0.4 million at the same valuation. We acquired Carlson Solar in order to expand our geographic presence and establish a sales office in the sizable Southern California solar installation market. The Carlson Solar assets acquired were determined to have all inputs and processes necessary for the transferred assets to continue to conduct normal operations after acquisition; accordingly, the purchase price was treated as a business combination pursuant to SFAS No. 141,Business Combinations. As additional contingent consideration, we granted to the sellers warrants to purchase 30,000 shares of our Class A common stock for a total estimated cost of $0.1 million, which, along with the 40,000 warrants granted to the sellers of Marin Solar at a total cost of $0.1 million, vested 50% on May 13, 2008 when our initial public offering was consummated (see Note 3, Shareholders’ Equity and Warrants). Accordingly, we recognized these warrants as additions to their respective purchase prices and allocated their costs to goodwill. The remaining warrants vest 2% each month after May 2008.
On May 23, 2008, we exchanged 280,000 shares of our Class A common stock, with a market value of $1.9 million, for our current President’s 11.6% ownership in Real Goods Carlson Inc. This resulted in the recognition of $1.5 million of goodwill, which is not expected to be deductible for tax purposes.
7
Table of Contents
The following table summarizes the estimated fair values of the Carlson Solar assets acquired and liabilities assumed at the date of acquisition. Goodwill is expected to be deductible for tax purposes.
(in thousands) | January 1, 2008 | ||
Current assets | $ | 1,466 | |
Property and equipment | 75 | ||
Goodwill and intangible assets | 2,678 | ||
Total assets acquired | 4,219 | ||
Current liabilities | 775 | ||
Net assets acquired | $ | 3,444 | |
On November 1, 2007, we purchased 100% ownership of Marin Solar. The purchase agreement provides for additional consideration contingent upon the amount of revenue generated from certain potential customers and the collection of certain rebates. We have not yet recognized any of this contingent consideration because its amount is not determinable beyond a reasonable doubt.
We are still in the process of preparing valuations of certain intangible assets; thus, the allocation of the purchase prices for Marin Solar and Carlson Solar are subject to refinement. We have included results from operations of these acquired companies in our condensed consolidated financial statements from their respective effective acquisition dates.
The following is supplemental unaudited interim pro forma information for the Carlson Solar acquisition as if we had acquired this business on January 1, 2007. The pro forma adjustments are based on currently available information and upon assumptions that we believe are reasonable in order to reflect, on a pro forma basis, the impact of this acquisition on our historical financial information.
Pro Forma | ||||||||||
(in thousands, except per share data) | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 | ||||||||
(unaudited) | ||||||||||
Net revenue | $ | 5,001 | $ | 12,231 | ||||||
Net income | $ | 159 | $ | 532 | ||||||
Net income per share - basic and diluted | $ | 0.02 | $ | 0.05 | ||||||
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 readers 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 residential solar energy integrator. We offer turnkey services to our solar energy system customers, including design, procurement, permitting, build-out, grid connection, financing referrals and warranty and customer satisfaction activities. Our solar energy systems use high-quality solar PV modules from manufacturers such as Sharp, SunPower and Kyocera Solar. We use proven technologies and techniques to help customers achieve meaningful savings by reducing their utility costs. In addition, we help customers lower their emissions output and reliance upon fossil fuel energy sources.
We have 30 years of experience in residential solar energy and believe we have installed more residential solar energy systems in the United States than any other company, including more than 2,600 residential and small commercial solar energy systems. In addition, we have sold a variety of solar products to more than 30,000 customers since our founding.
8
Table of Contents
Our focused customer acquisition approach and our efficiency in converting leads into customers enable us to have what we believe are low customer acquisition costs. We believe that our Real Goods brand has a national reputation for the highest quality customer service in the solar energy market, which leads to a significant number of word-of-mouth referrals and new customers. We also generate leads by selling solar and other renewable energy and sustainable living products and resources through our nationally distributed catalog and website, including books and DVDs on renewable energy and sustainable living, products for solar and other water heating, green building products and systems, air purification products, water conservation and purification products, and other solar and sustainable living related products. Our Solar Living Center in Hopland, California features interactive demonstrations for renewable energy and environmentally sensible technologies and is the largest facility of its kind, with approximately 2 million visitors since it opened in 1996.
Results of Operations
The following table sets forth certain financial data as a percentage of revenue for the periods indicated:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of goods sold | 70.2 | % | 60.9 | % | 71.0 | % | 63.4 | % | ||||
Gross profit | 29.8 | % | 39.1 | % | 29.0 | % | 36.6 | % | ||||
Expenses: | ||||||||||||
Selling and operating | 27.8 | % | 31.8 | % | 29.3 | % | 31.1 | % | ||||
General and administrative | 3.5 | % | 1.2 | % | 3.8 | % | 1.6 | % | ||||
Total expenses | 31.3 | % | 33.0 | % | 33.1 | % | 32.7 | % | ||||
Income (loss) from operations | (1.5 | )% | 6.1 | % | (4.1 | )% | 3.9 | % | ||||
Interest income | 1.0 | % | — | % | 0.6 | % | — | % | ||||
Income tax expense (benefit) | (0.2 | )% | 2.7 | % | (1.4 | )% | 1.8 | % | ||||
Minority interest in net (income) loss of consolidated subsidiaries, net of tax | — | % | — | % | — | % | — | % | ||||
Net income (loss) | (0.3 | )% | 3.4 | % | (2.1 | )% | 2.1 | % | ||||
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Net revenue. Net revenue increased $4.3 million, or 95.9%, to $8.8 million during the second quarter of 2008 from $4.5 million during the second quarter of 2007. This increase in net revenue is primarily the result of our acquisitions of Marin Solar in the fourth quarter of 2007 and Carlson Solar in the first quarter of 2008, as well as internal growth.
Gross profit. Gross profit increased $0.9 million, or 49.6%, to $2.6 million during the second quarter of 2008 from $1.8 million during the second quarter of 2007. As a percentage of net revenue, gross profit decreased to 29.8% during the second quarter of 2008 from 39.1% during the second quarter of 2007. The decrease in gross profit percentage partially reflects the acquisition of Marin Solar, which had larger average installation sizes that traditionally produce lower gross profit margins.
Selling and operating expenses. Selling and operating expenses increased $1.0 million, or 71.4%, to $2.5 million during the second quarter of 2008 from $1.4 million during the second quarter of 2007. As a percentage of net revenue, selling and operating expenses decreased to 27.8% during the second quarter of 2008 from 31.8% during the second quarter of 2007. The increase in selling and operating expenses resulted primarily from the addition of costs associated with the acquisitions of Marin Solar and Carlson Solar. The 400 basis point decrease in percentage of revenue was primarily the result of leveraging our expenses off a larger revenue base.
General and administrative expenses. General and administrative expenses increased $258,000 to $0.3 million during the second quarter of 2008 from $53,000 during the second quarter of 2007. As of percentage of net revenue, general and administrative expenses increased to 3.5% during the second quarter of 2008 from 1.2% during the second quarter of 2007, reflecting an increase in our infrastructure to support our recent acquisitions, public company costs, and costs related to our growth strategy.
Interest income. Interest income was $0.1 million for the second quarter of 2008 reflecting the investment of funds generated by our initial public offering.
Net income (loss). As a result of the above factors, net income decreased $0.2 million to a net loss of $27,000 during the second quarter of 2008 from net income of $0.2 million during the second quarter of 2007. Net income per share decreased $0.02 per share to $0.00 per share during the second quarter of 2008 from net income of $0.02 per share during the second quarter of 2007.
9
Table of Contents
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Net revenue. Net revenue increased $6.5 million, or 73.6%, to $15.4 million during the first half of 2008 from $8.9 million during the first half of 2007. This increase in net revenue is primarily the result of our acquisitions of Marin Solar in the fourth quarter of 2007 and Carlson Solar in the first quarter of 2008, as well as internal growth.
Gross profit. Gross profit increased $1.2 million, or 37.7%, to $4.5 million during the first half of 2008 from $3.3 million during the first half of 2007. As a percentage of net revenue, gross profit decreased to 29.0% during the first half of 2008 from 36.6% during the first half of 2007. The decrease in gross profit percentage partially reflects the acquisition of Marin Solar, which had larger average installation sizes that traditionally produce lower gross profit margins.
Selling and operating expenses. Selling and operating expenses increased $1.8 million, or 63.4%, to $4.5 million during the first half of 2008 from $2.8 million during the first half of 2007. As a percentage of net revenue, selling and operating expenses decreased to 29.3% during the first half of 2008 from 31.1% during the first half of 2007. The increase in selling and operating expenses resulted primarily from the addition of costs associated with the acquisitions of Marin Solar and Carlson Solar. The percentage of revenue decrease was primarily the result of leveraging our expenses off a larger revenue base.
General and administrative expenses. General and administrative expenses increased $0.4 million to $0.6 million during the first half of 2008 from $0.1 million during the first half of 2007. As of percentage of net revenue, general and administrative expenses increased to 3.8% during the first half of 2008 from 1.6% during the first half of 2007, reflecting an increase in our infrastructure to support our recent acquisitions, public company costs, and costs related to our growth strategy.
Interest income. Interest income was $0.1 million for the second quarter of 2008 reflecting the investment of funds generated by our initial public offering.
Net income (loss). As a result of the above factors, net income decreased $0.5 million to a net loss of $0.3 million during the first half of 2008 from net income of $0.2 million during the first half of 2007. Net income per share decreased $0.05 to a net loss of $0.03 per share during the first half of 2008 from net income of $0.02 per share during the first half of 2007.
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 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. Additionally, the fourth quarter is often impacted by unfavorable weather in certain geographic regions. Much of the seasonality in the business in previous quarters has been offset by changes in government activities as well as strong organic growth.
Liquidity and Capital Resources
Our capital needs arise from working capital required to fund our purchases of solar PV modules and inverters, capital related to acquisitions of new businesses, 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 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 cannot accurately be predicted. We did not have any material commitments for capital expenditures as of June 30, 2008, and we do not presently have any plans for future material capital expenditures. We plan to continue to pursue business acquisition and other opportunities to expand our sales territories, technologies and products, and increase our sales and marketing programs as needed.
Cash Flows
The following table summarizes our primary sources (uses) of cash during the periods presented:
Six Months Ended June 30, | ||||||||
(in thousands) | 2008 | 2007 | ||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | (2,796 | ) | $ | 845 | |||
Investing activities | (2,988 | ) | (7 | ) | ||||
Financing activities | 30,871 | (769 | ) | |||||
Net increase in cash and cash equivalents | $ | 25,087 | $ | 69 | ||||
10
Table of Contents
Operating activities. Our operating activities used net cash of $2.8 million during the first half of 2008 and provided net cash of $0.8 million during the first half of 2007. Our net cash used in operating activities during the first half of 2008 was primarily attributable to decreased accounts payable, deferred revenue, and other accrued liabilities of $1.7 million, a significant portion of which represented the settlement, in the normal course of business, of liabilities assumed as part of the Marin Solar and Carlson Solar acquisitions, increased accounts receivable and other current assets of $1.5 million, and our net loss of $0.3 million, partially offset by noncash adjustments to the net loss of $0.3 million and decreased inventory and deferred costs of $0.3 million. Our net cash provided by operating activities during the first half of 2007 primarily resulted from decreased accounts receivable of $0.5 million, decreased inventory and deferred costs of $0.4 million, and net income and noncash adjustments to net income of $0.2 million each, partially offset by decreased accounts payable, accrued liabilities, and deferred revenue of $0.4 million.
Investing activities. Our investing activities used net cash of $2.9 million and $7,000 during the first half of 2008 and 2007, respectively. The cash used in investing activities during the first half of 2008 was used primarily to acquire Carlson Solar on January 1, 2008 for a net $2.9 million.
Financing activities. Our financing activities provided net cash of $30.9 million during the first half of 2008 and used net cash of $0.8 million during the first half of 2007. The financing net cash provided during the first half of 2008 primarily reflects net proceeds from our IPO of $48.2 million, partially offset by cash used to repay borrowings from Gaiam of $17.3 million that were used to acquire businesses and fund our daily operations.
We believe our available cash, cash expected to be generated from operations, and cash generated by the sale of Class A common stock should be sufficient to fund our business for the foreseeable future. However, our projected cash needs may change as a result of possible acquisitions, unforeseen operational difficulties, or other factors.
In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, minority 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.
Contractual Obligations
We have commitments under operating leases and various service agreements with Gaiam, but do not have any outstanding commitments under long-term debt obligations or purchase obligations. The following table shows our commitments to make future payments under operating leases:
(in thousands) | Total | < 1 year | 1-3 years | 3-5 years | > 5 yrs | ||||||||||
Operating lease obligations | $ | 369 | $ | 198 | $ | 171 | $ | 0 | $ | 0 | |||||
After May 13, 2008, the date we ceased to be a member of Gaiam’s consolidated group for federal income tax purposes and to the extent we become entitled to utilize loss carryforwards from our separate tax returns, we will distribute to Gaiam the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. Accordingly, we recognized a valuation allowance against all of our tax loss carryforwards as of the effective date of the tax sharing agreement. As of May 13, 2008, such potential future payments to Gaiam, which would be made over a period of many years, aggregated to approximately $2.3 million.
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 our Registration Statement on Form S-1 (Registration No. 333-149092) which was declared effective May 7, 2008. Additional risks and uncertainties that we currently deem immaterial may also impair our business operations, and historical results are not necessarily an indication of the future results. 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.
11
Table of Contents
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risks, which include foreign exchange rates and changes in U.S. interest rates. We do not engage in financial transactions for trading or speculative purposes.
We purchase a significant amount of renewable energy and organic product inventory from vendors outside of the United States in transactions that are primarily U.S. dollar denominated transactions. Since the percentage of our international purchases denominated in currencies other than the U.S. dollar is small, any currency risks related to these transactions are immaterial to us. However, a decline in the relative value of the U.S. dollar to other foreign currencies could lead to increased purchasing costs. In order to mitigate this exposure, we make virtually all of our purchase commitments in U.S. dollars.
Item 4T. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) of Real Goods Solar, Inc. at the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at the end of such period, the disclosure controls and procedures of Real Goods Solar, Inc. were effective in alerting them, on a timely basis, to material information required to be disclosed by us in the reports that we file or furnish under the Securities Exchange Act of 1934.
Changes in Internal Control over Financial Reporting
Not required.
Item 1. | Legal Proceedings |
From time to time, we are involved in legal proceedings that we consider to be in the normal course of business. We do not believe that any of these proceedings will have a material adverse effect on our business.
Item 1A. | Risk Factors |
There have been no material changes to the risk factors discussed under the heading “Risk Factors” in our Registration Statement on Form S-1 (Registration No. 333-149092) which was declared effective May 7, 2008.
Item 2. | Sales of Unregistered Securities and Use of Proceeds |
Issuance of Unregistered Securities
Not Applicable.
Initial Public Offering
There has been no material changes in the information provided in our quarterly report on Form 10-Q with respect to the use of proceeds from our initial public offering.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 5. | Other Information |
None.
12
Table of Contents
Item 6. | Exhibits |
a) | Exhibits. |
Exhibit No. | Description | |
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 (filed herewith). | |
31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 (filed herewith). | |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). | |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
13
Table of Contents
In accordance with the requirements of the Securities and Exchange Act, the registrant caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
Real Goods Solar, Inc. | ||
(Registrant) | ||
August 13, 2008 | ||
By: | /s/ John Schaeffer | |
John Schaeffer | ||
Chief Executive Officer | ||
By: | /s/ Erik Zech | |
Erik Zech | ||
President and Chief Financial Officer | ||
(principal accounting officer) |
14