RGS Energy today provided certain preliminary unaudited results for its fourth quarter ended December 31, 2014.
The preliminary, unaudited results presented herein are based on currently available information. These preliminary, unaudited results are subject to the completion of RGS Energy’s quarterly closing and review procedures and the regular annual review process by its independent registered public accounting firm. As a result, the information presented herein is subject to change.
The company estimates total revenue from continuing operations to be approximately $18 million, the same amount as the prior year quarter.
Loss from Continuing Operations after Taxes
The company estimates its loss from continuing operations to be in excess of $13 million, which includes an impairment charge for the Sunetric segment of $11 million, versus approximately $2 million for the prior year quarter.
The company estimates its net loss, which includes the discontinued commercial segment, to be approximately $16 million, which includes the Sunetric impairment charge of $11 million, versus approximately $3 million for the prior year quarter.
About Sunetric Impairment Charge
RGS Energy will take a non-cash, non-tax-deductible income statement charge for the fourth quarter of calendar year 2014 for the impairment of its intangible assets in its Sunetric segment.
Under accounting guidelines, companies are required to conduct an annual goodwill impairment test for each business unit and during intervening periods if circumstances indicate a possible impairment. Goodwill arises in an acquisition when the fair value paid for a business exceeds the value of the identifiable net assets. Recently, the principal electric utility in Hawaii, the market Sunetric operates within, has taken further measures that the company believes diminishes the value proposition of solar for both residential and commercial customers. Those actions, along with a recent precipitous decline in sales for the Sunetric segment, caused management to conduct a review of the intangible assets recorded for Sunetric in conjunction with its preparation of its financial statements as of December 31, 2014. The electric regulatory environment along with the recent decline in sales has caused the company’s expectations for future growth and profitability to be lower than its previous estimates. As a result of its year–end 2014 impairment review, the company has determined that a write down of its intangible assets related to Sunetric of approximately $11 million will be recorded. The impairment reflects $8 million of goodwill, $1 million of trademarks and $2 million of purchased backlog and non-compete agreements.
The company acquired Sunetric during May 2014 in an all-stock transaction. At the time of the acquisition, the company transferred cash of approximately $2 million to this subsidiary for working capital purposes.
As a result of recording this impairment charge, the company will not have positive net worth and, accordingly, will not meet the Continued Listing Standards for NASDAQ Capital Market Companies. The company is evaluating this matter.
Cash and Line-of-Credit
For the nine-month period ended September 30, 2014, the company reported negative cash flow from operations of approximately $31 million, or approximately $10 million per quarter. As shown below, for the fourth quarter, the company was successful in managing its cash:
As previously announced, the company has been taking steps to restructure its business including (i) exiting the large commercial segment, including selling unsigned contracts in its pipeline for which approximately $400,000 was received during the fourth quarter, (ii) selling the assets of its catalog segment, for which approximately $1 million was received during the fourth quarter and (iii) actions to achieve cost efficiencies. The company intends to continue to restructure its business operations.
For the nine-months ended September 30, 2014, the company reported in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, (i) a net loss of $41 million, (ii) negative cash flow from operations of $31 million, and (iii) amendments to its line-of-credit facility reducing the loan commitment by $1 million and its borrowing base capacity by $1 million. Subsequent to the issuance of that report, the company experienced difficulty obtaining payment terms from certain equipment suppliers and other third parties which has impacted the company’s ability to convert its backlog of signed contracts into revenue that the company believes is related to disclosure of these circumstances.
The impact of (i) access to equipment as discussed above, (ii) adverse weather prohibiting construction activity on the East Coast, where the company’s substantial backlog is not being converted to cash, and (iii) revisions to the availability under the line-of-credit has resulted in the company’s cash position declining to approximately $1 million as of February 12, 2015.
The company needs to, and intends to, raise additional financing to (i) position the company to convert its backlog, which as of February 12, 2015 is approximately $55 million and (ii) best position the company to renew its line-of-credit under favorable terms for the ensuing year. Financing in the form of equity would result in significant dilution to existing shareholders of the company.
On July 9, 2014, the company completed a PIPE offering of approximately $7 million at a price per share of $2.40. Subsequently, the company’s stock price has declined to $0.40 as of February 12, 2015 and three of the investors in the offering (out of approximately 20 total investors in the offering) have asserted claims against the company in two separate lawsuits alleging certain misrepresentations and omissions in the offering. The company intends to vigorously defend itself in the litigation.