Real Goods Solar’s future clouded by falling stock, looming lawsuits

LOUISVILLE — Real Goods Solar Inc., a once-promising company doing business coast to coast, is teetering on the edge of being delisted amid mounting losses and three shareholder lawsuits alleging the company made misleading statements about its financial health.

Real Goods Solar (Nasdaq: RGSE), founded in 1978 and formerly a part of Louisville-based Gaiam Inc. (Nasdaq: GAIA), installs rooftop solar systems nationwide. The company’s stock traded at a mere 28 cents in mid-March, down from $4.39 a year ago. Its share price must rise to $1 per share for more than 10 consecutive days by June 15 or it will be taken off the Nasdaq exchange.

Real Goods Solar, which has seen the resignations of its chief executive and chief financial officers, said earlier in March that it would reduce its headcount by 100 jobs, or more than 30 percent, as part of a reorganization. The announcement followed a fourth-quarter earnings report that projected a $16 million loss.

The company also noted an $11 million impairment charge related to its acquisition of Hawaiian-based Sunetric just a year ago. The acquisition has flailed as regulatory changes in Hawaii have made rooftop solar a less attractive option in that state.

In a November report, Moody’s Investors Services highlighted RGS as having “extremely elevated credit risk.” The report cited RGS’ earnings as being too low to support interest payments, a negative operating margin and an increase in debt as factors that led to its low score.

RGS’ financial troubles come as it faces three shareholder lawsuits, recently consolidated by U.S. District Judge Lorna Schofield for the Southern District of New York. The cases will be combined for certain legal procedures before they appear separately if they head to trial.

The lawsuits name as defendants current and former executives as well as members of the board of directors. Real Goods Solar has asked that the cases be dismissed.

The lawsuits center on claims by Rye, N.Y., resident Richard Smithline and Midsummer Small Cap Master Ltd. in New York City, Alpha Capital Anstalt in Liechtenstein, and Brio Capital Master Fund Ltd., that Real Goods Solar made misleading statements about its financial health as the company sought to raise additional cash last summer. RGS raised a total of $6.4 million in the private placement in which it had sought to raise $15 million.

Andrew Lopez, an attorney for Denver-based Schuchat International Law Firm LLC who has advised clients in private placements, said that such deals can pressure companies as they highlight both their financial strengths and risks when presenting to investors.

“Where it always gets complicated is you’re trying to get people to invest money and then you have to highlight all the risks of that investment at the same time,” Lopez said. “On one hand, you’re trying to sell something; on the other hand, you’re trying to tell them why you could lose all your money.”

The plaintiffs contend they invested a total of $1.6 million in Real Goods Solar  based on statements about its path toward profitable growth. But they contend the company failed to fully disclose its liabilities and a default on its obligations with Silicon Valley Bank in Broomfield as of June 30, 2014, just days before Brio bought stock.

Brio bought $300,000 July 9, unaware that RGS was preparing to disclose a $28.4 million operating loss for the second quarter that had ended just days before. In addition, in court documents, Brio said RGS did not disclose that its cash balance had dropped dramatically, from $11.1 million at the end of the first quarter to $1.7 million at the close of the second quarter. RGS officials did not respond to requests for comment on the allegations in the lawsuit.

Press releases and earnings statements, meanwhile, revealed that Real Goods Solar planned to exit the large commercial market, instead focusing on residential markets to improve the company’s profit margin.

Some of the plaintiffs in the lawsuit have since sold their shares at a loss. Ken Zitter and Sameer Rastogi, attorneys for the plaintiffs, also did not respond to requests for comment.

Shareholders generally must prove that a public company made false or misleading statements in disclosures to win their cases, said Ladd Hirsch, litigation partner for Diamond McCarthy LLP in Texas.

“You’ve got to show that there were some specific and truly false or misleading statements that were made, which induced the shareholders to invest,” he said.

Shareholder lawsuit plaintiffs typically seek to certify their cases as class-action lawsuits to increase their returns, he said. In most cases, continuing the lawsuit does not make economic sense if the court denies certification and only a small group of plaintiffs remains to proceed with the claims.

“The most important battle at the start of the lawsuit is over whether you can get the class certified by the court,” he said. “It’s difficult to get classes certified because there are many procedural requirements that must be met before a court will agree to grant certification and allow the lawsuit to proceed as a class action.”

Plaintiffs of the RGS lawsuits have not achieved class-action status, but RGS’ sinking shares also may have affected companies closer to home.

Gaiam Inc. recently owned 4.1 million shares of Real Goods Solar, according to a 2013 statement announcing that the company had sold 6 million shares for $16.4 million. Steve Thomas, Gaiam chief financial officer, did not respond to messages requesting comment on Real Goods Solar’s financial performance.

As shareholders have fled Real Goods Solar, the company has sought to raise capital, including selling for $1 million a portion of its business to John Schaeffer, a defendant in the lawsuits and member of Real Goods Solar’s board of directors. The company also recently raised $2.75 million in a public offering amid a $55 million backlog of projects that it is struggling to fund.

RGS also said in a March 2 statement that it would embark on a reorganization in which it plans major changes to its California operations. RGS plans efficiencies such as relying on call-center sales instead of field sales while maintaining its engineering operations at its Louisville headquarters. The company expected to complete most of its restructuring within the first quarter of this year.

“The foundation of our new operational model focuses on our core strengths of engineering, e-sales, operations management and leasing,” said RGS Energy chief executive Dennis Lacey in the statement. “We expect this effort to streamline our operations and lower our fixed operating costs, as we leverage our recently strengthened financial position to address an over $50 million installation backlog.”

Steve Lynn can be reached at 970-232-3147, 303-630-1968 or slynn@bizwestmedia.com. Follow him on Twitter at @SteveLynnBW.

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