RGS Energy has reported results for its second quarter ended June 30, 2015.
"During the second quarter, we made great strides towards turning around our business that resulted in several accomplishments, including our return to positive stockholders' equity and positive working capital," stated RGS Energy CEO, Dennis Lacey. "Since the end of the quarter, we have further reduced our accounts payable, the aging of which was hindering our business. We are now pivoting our efforts toward revenue growth by expanding our sales and construction capabilities."
Summary Business Update
The company previously reported completing a series of financial transactions that have strengthened its financial position, as well as actions taken to restructure its business operations for improved operating results. These results during the quarter include reporting positive stockholders' equity and positive working capital, as well as cutting the operating loss in half compared to the first quarter of 2015. See further highlights regarding the company's financial performance in the table, below.
Q2 2015 Financial Summary
1. In the second quarter of 2015, net revenue increased to $14.7 million from $10.6 million in the previous quarter and decreased from $19.6 million in the second quarter of 2014. The company did not emphasize originating new sales during 2015, as it focused on converting its long-standing backlog to revenue and achieving a better balance between sales and construction. Now that the company has reduced its backlog and established a stronger financial position that the company believes will support the expansion of its sales organization, it is now refocused on new sales order generation.
- Residential segment average selling price (ASP) on new sales orders decreased 0.5% from the previous quarter and rose 5.4% from the second quarter of 2014.
- Approximately 25% of the company's revenue for the second quarter of 2014 was from two states, Missouri and Colorado, which previously offered attractive incentives to homeowners. With the repeal of those incentives, the revenue from these states in the second quarter of 2015 was approximately 1% of revenue.
- The company installed solar equipment on 438 roofs in the second quarter of 2015, as compared to 264 installations in the previous quarter and 568 installations in the second quarter of 2014. The sequential increase in rooftop installations is primarily due to the company's improved financial condition that provided the ability to acquire solar panels and complete backlogged solar installations. The decline in rooftop installations from the second quarter of 2014 is due to the reduction in the Missouri, Colorado and California markets.
2. In the second quarter of 2015, income from continuing operations net of tax improved to $1.6 million from a loss of $3.6 million in the previous quarter, and declined from $1.7 million in the same year ago quarter.
- Gross margin for the residential segment was 15.2% in the second quarter of 2015, which increased from 10.3% in the previous quarter and declined from 22.0% in the second quarter of 2014. The sequential increase primarily reflects the gross margin percentage increasing whenever there is an increase in revenue as there is a fixed cost element in the cost of goods sold. The year-over-year decline reflects residential segment revenue declining by 30% and an approximate three-fold increase in customer cancellations. The customer cancellations arose from the company's previous inability to make installations at an appropriate rate.
- Gross margin for the Sunetric segment was 21% in the second quarter of 2015, which increased from 5% in the first quarter of 2015 and decreased from 26.3% in the second quarter of 2014. The sequential increase primarily reflects increased residential installations, as well as the company's refocus on its Hawaiian Island business for commercial projects.
- The Sunetric segment contributed $160,000 in the second quarter of 2015, as compared to a loss of $150,000 in the same year-ago quarter. The increase was attributable to an increased level of residential approval by the local utility and improved integration of business activities, including cost saving initiatives.
- Aggregate selling and operating and general and administrative expenses decreased $5.0 million to $4.2 million in the quarter versus the prior year quarter. The decrease in the selling and operating expenses was primarily attributable to a decrease in headcount; general and administrative cost saving initiatives; the restructuring of the sales organization and commission plan; and reducing the cost of customer leads. Since RGS Energy plans to increase the size of its sales organization, it expects to incur up-front sales and marketing costs that will increase its total selling and operating expenses both in dollar amount and as a percentage of revenue for the remainder of 2015.
- Derivative gain, net, was $4.5 million for the quarter versus $1.8 million for the previous quarter and $6.1 million for the second quarter of 2014. The change in derivative liability is principally due to the company's market capitalization declining from the same prior year quarter as well as the exercise of the remaining warrants from the February 2015 offering. During the quarter, the company completed a warrant exchange transaction that eliminated the majority of the company's derivative warrant liabilities. By removing the majority of the outstanding derivative warrant liabilities, the company's financial results will no longer be subject to the same degree of material volatility from non-cash charges to income that result from changes in the values of these derivative warrant liabilities in the past.
3. Loss from discontinued operations, net of tax, was $0.1 million, reflecting the winding down of the company's Large Commercial segment. For the prior year quarter, discontinued operations were a loss of $23 million, underscoring management's earlier announced strategic decision to exit the Large Commercial business in mainland U.S.
4. Including both continuing and non-continuing operations, the net income for the quarter totaled $1.4 million or $0.28 per share, as compared to a net loss of $21.4 million or $(9.27) per share in the second quarter of 2014.
Six Months Ended June 30, 2015
- Net revenue decreased 24% to $25.3 million versus the same year-ago period.
- Solar system installations on homes and small businesses decreased 35.2% to 702 installations in the period from 1,084 installations in the same year-ago period.
- Operating loss from continuing operations was $8.0 million, as compared to $12.5 million in the same year-ago period.
- Loss from discontinued operations, net of tax, was $0.3 million, as compared to a loss of $25.8 million in the same year-ago period.
- Net loss was $2.3 million or $(0.58) per share, as compared to a loss of $36.2 million or $(16.32) per share in the same year-ago period. The improvement from the prior year is primarily attributable to management's decision to exit the Large Commercial segment in mainland U.S. and actions to reduce operating costs.
Backlog and Net Sales Orders
Backlog is increased for transactions from acquired companies at the date of acquisition and thereafter for net sales orders (representing newly signed contracts with customers, net of contract cancellations or holds), and decreased for installations, which are reflected in revenue.
- Backlog decreased 38.8% to $30.2 million at June 30, 2015, as compared to a backlog of $49.3 million at June 30, 2014. Residential backlog decreased 40.5% to $17.6 million at June 30, 2015 versus $29.5 million at June 30, 2014. As discussed above, the company did not focus on new sales order generation during the first half of 2015, as it had to first obtain the necessary financing to convert the backlog, and then work-off its long standing backlog, which also declined due to customer cancelations arising from the backlog not being installed at a faster rate. As such, new sales orders for our residential segment declined by $19.8 million and net cancellations increased by $3.8 million versus the second quarter of 2014.
- Backlog decreased 34% to $30.2 million at June 30, 2015 versus $45.7 million at March 31, 2015.
Sunetric's backlog declined 23.4% to $12.6 million at June 30, 2015 versus $16.5 million at March 31, 2015. The decline was due to increased level of residential installation approvals by the local utility.
Residential segment backlog declined 40% to $17.6 million at June 30, 2015 versus $29.2 million at March 31, 2015. The decline was primarily due to installations of approximately $11 million. New sales orders and cancellations were approximately the same during the second quarter of 2015.
Q2 2015 Financing Capacity Highlights
- Cash and cash equivalents were $5.3 million at June 30, 2015 versus $1.9 million at December 31, 2014.
- For installations during the quarter, 43% were paid for in-cash by customers, 44% used third-party loan programs, and 13% utilized company and third-party lease programs.
- Warrant holders exercised Series B warrants into 1.6 million shares of Class A common stock providing net proceeds of more than $4 million.
- As previously reported, the company arranged for additional capital with net proceeds of $4.4 million.
- As previously reported, RGS Energy's largest shareholder converted $4.2 million of debt and accrued interest to equity.
"During the quarter, we cut our operating loss, which included approximately $800,000 of litigation and restructuring charges during the quarter, nearly in half compared to the first quarter of 2015," said Dennis Lacey, RGS Energy's CEO. "We also reported positive net income. Since this was primarily the result of a derivative gain, a non-cash item that we do not expect to recur at this level, we will continue striving to improve results at the operating income line. We intend to achieve this by expanding our sales and construction capabilities, all with the goal of 2016 being a growth year for the company.
"During the remainder of 2015, we will incur costs to expand our sales and construction capabilities as we position the company for revenue growth in 2016. Those costs, along with our current rate of installations after past cancellations and not being subject to the same level of derivative warrant income going forward, are such that we do not expect to report net income for the remaining quarters of 2015.
"We already have a national footprint — we are in all the key solar states and operate with a blend of both company field sales and our e-sales call center along with in-house construction crews and alliance partners for construction. The recently completed series of financial transactions have strengthened our financial position and provided us with working capital to further reduce our accounts payable and support our current operations. We also plan to apply this working capital to expand our sales and construction capabilities, as well as our presence in new states. These expansions represent the next step in our turnaround plan."
RGS Energy National Footprint
RGS Energy is one of the nation's leading rooftop installers of solar equipment, serving residential and small business customers in eight mainland U.S. states and Hawaii. The company markets its solar power systems through a mix of field sales teams and e-sales call center approach, as well as installs its systems using in-house and third-party integrators. For East Coast operations, the company primarily utilizes field sales through solarize programs and in-house construction crews. In California and Colorado, the company markets solely through its e-sales, call center-based approach and installs only through its authorized third-party integrators.