RGS Energy, a residential and small commercial solar company since 1978, has reported results for its third quarter ended September 30, 2016. The Company also filed today its quarterly report on Form 10-Q, as well as posted its most recent Investor Presentation to the Investor Relations’ section of its website.
Business Turnaround and Capital Raising Update
The Company’s business turnaround strategy is to optimize its operating costs such that the required level of sales necessary to achieve break-even or better operating results is lowered. To fully execute the business turnaround strategy, the Company had to become better capitalized. The Company successfully raised $10 million of convertible notes on April 1, 2016 with a large portion of the proceeds deposited in a restricted cash account; releases of cash from the restricted cash account occurs upon certain predetermined intervals, the occurrence of certain trigger events, or as the convertible notes are converted to common equity. As a result, the Company did not have access to this capital to execute its business turnaround strategy for the last six months.
To be able to successfully execute its strategy to operate the Company at break-even or better results in the future, the Company made it a priority for the last six months to raise additional financial capital:
- Raised on September 14, 2016 gross proceeds of $2.8 million from convertible preferred stock, all of which was converted to common equity of the Company by September 29, 2016.
- Received on September 30, 2016 proceeds of $1.6 million from the exercise of warrants issued with the convertible preferred stock.
- Commencing October 3, 2016, principal and interest on the Company’s convertible notes began to convert into Class A common equity with the following activity through November 4, 2016:
| Amount of Principal converted to Class A common stock | $7.1 million | ||
| Release of cash from restricted cash | $5.8 million | ||
| Net increase in shareholders’ equity from conversions | $5.9 million |
- The Company has used the proceeds from the releases from the restricted cash account to reduce accounts payable, purchase materials to convert its backlog to revenue, and for other corporate purposes.
For the third quarter of 2016, the Company reported a net loss of $7.7 million. Under applicable accounting rules for complex financial instruments, the Company recorded during the third quarter of 2016 $4.6 million of non-cash charges to operations for the above capital raises, representing approximately 60% of the loss for the quarter. The Company’s Comparable Net Loss, as shown in the accompanying Supplemental Presentation of RGS Energy Results, is approximately $3 million, as was the Comparable Net Loss for the second quarter of 2016. The Company’s revenue for the last six months was materially impacted by not having the necessary access to capital to grow revenue. The Company maintained the same level of Comparable Net Loss during this period as it was successful at reducing its operating costs. When compared to the results for the first nine months of 2015, the company reduced its cash outflow from operations by approximately $8 million.
Cash and cash equivalents were $1.4 million at September 30, 2016 versus $0.5 million at June 30, 2016.
Management Commentary
“The last six months have been challenging for the company in that we did not have the financial capital available to fully execute our strategy and grow revenue,” said Dennis Lacey, CEO of RGS Energy. “We are very pleased to be realizing the financial capital we had arranged previously, as this is necessary for our future growth. We look forward to being able to demonstrate what our employees can do with the benefit of sufficient capital for growth.”
| Segment Results: | |||||||||
| Residential Segment: | 3rd Quarter | 2nd Quarter | 3rd Quarter | ||||||
| (000’s omitted) | 2016 | 2016 | 2015 | ||||||
| Revenue | $ | 1,427 | $ | 3,296 | $ | 6,894 | |||
| Cost of goods sold | 1,591 | 2,842 | 6,032 | ||||||
| Gross Margin | (164 | ) | 454 | 862 | |||||
| Gross Margin % | (11.49 | )% | 13.77 | % | 12.50 | % | |||
| Operating Expenses | 1,235 | 1,347 | 2,671 | ||||||
| Business Unit Contribution | $ | (1,399 | ) | $ | (893 | ) | $ | (1,809 | ) |
| Backlog | $ | 9,722 | $ | 8,225 | $ | 11,503 | |||
During the third quarter of 2016, the residential segment did not have access to sufficient capital to grow revenue.
The Company installed solar equipment on 54 roofs in the third quarter of 2016, as compared to 98 installations in the previous quarter and 204 installations in the third quarter of 2015.
Gross margin percentage in the third quarter of 2016 declined as compared to the previous quarter and the year-ago quarter. The decrease is due to the impact of lower revenue compressing the gross margin arising from less efficient absorption of the fixed portion of operating costs.
Residential segment backlog increased to $9.7 million at September 30, 2016 from $8.2 million at June 30, 2016. New sales orders decreased 36% to $3.7 million during the third quarter of 2016 as compared to $5.8 million in the prior year quarter. Net cancellations decreased 85% to $0.9 million in the third quarter of 2016 as compared to $5.2 million in the third quarter of 2015.
| Sunetric Segment: | 3rd Quarter | 2nd Quarter | 3rd Quarter | ||||||
| (000’s omitted) | 2016 | 2016 | 2015 | ||||||
| Revenue | $ | 1,036 | $ | 1,588 | $ | 3,544 | |||
| Cost of goods sold | 755 | 1,625 | 2,848 | ||||||
| Gross Margin | 281 | (37 | ) | 696 | |||||
| Gross Margin % | 27.12 | % | (2.33 | )% | 19.64 | % | |||
| Operating Expenses | 381 | 254 | 582 | ||||||
| Business Unit Contribution | $ | (100 | ) | $ | (291 | ) | $ | 114 | |
| Backlog | $ | 2,871 | $ | 4,757 | $ | 10,950 | |||
During the third quarter of 2016, the Sunetric segment did not have access to sufficient capital to grow revenue. Sales for Sunetric have been adversely impacted by the regulations of the local utility and, in response, Sunetric has begun piloting sales of other energy savings products. Gross margin percentage for Sunetric in the third quarter of 2016 increased as compared to the year-ago quarter. The improvement was due to a favorable product mix shift to higher gross margin commercial projects.
| Corporate Segment & Other: | |||||||||
| (000’s omitted) | 3rd Quarter | 2nd Quarter | 3rd Quarter | ||||||
| Corporate Segment: | 2016 | 2016 | 2015 | ||||||
| General and Administrative expenses | $ | 1,268 | $ | 1,478 | $ | 1,561 | |||
| Stock Option Compensation | 175 | 177 | 131 | ||||||
| Litigation | – | – | 1084 | ||||||
| Depreciation & amortization | 96 | 101 | 92 | ||||||
| Business Unit Contribution | $ | (1,539 | ) | $ | (1,756 | ) | $ | (2,868 | ) |
| Other: | |||||||||
| Other Income and Interest Expense | $ | (1,330 | ) | $ | (876 | ) | $ | 20 | |
| Change in derivative liabilities, net | (535 | ) | 309 | 660 | |||||
| Debt Extinguishment | (2,831 | ) | – | – | |||||
| Income Taxes | – | 27 | 2 | ||||||
| Discontinued Operations, net of tax | (1 | ) | 70 | (397 | ) | ||||
Change in valuation of derivative liabilities, net, was a loss of $535,000 in the third quarter of 2016 versus a gain of $309,000 in the previous quarter and a gain of $660,000 for the third quarter of 2015. The loss for the third quarter of 2016 is principally related to change in value of the embedded derivative liability arising from the convertible note financing. Included in interest expense was $1 million of non-cash amortization of debt discount arising from the convertible note and convertible preferred stock financings.
On September 14, 2016, the Company raised $2.8 million of convertible preferred stock that was accounted for as debt. By September 29, 2016, all of the convertible preferred stock was converted to Class A common stock of the company, extinguishing the debt. As the trading price of the Company’s stock was higher at conversion than at issuance of the debt, a loss on extinguishment is recorded for this 14-day period. As of September 30, 2016, the amount recorded as an increase to shareholders’ equity for the September 14, 2016 offering was equal to the cash received, net of costs, and warrants exercised aggregating $3.8 million.
Loss from discontinued operations, net of tax, was $1,000, reflecting winding down of the Company’s Large Commercial segment. This compares to a loss from discontinued operations, net of tax, of $0.4 million in the third quarter of 2015.
