Real Goods Solar Inc (NASDAQ:RGSE) Q3 2018 Results Earnings Conference Call November 7, 2018 4:30 PM ET
Dennis Lacey – CEO
Ishfaque Faruk – WestPark Capital
Good afternoon, and thank you for joining us today to discuss RGS Energy’s third quarter ended September 30, 2018.
With us today is the company’s Chief Executive Officer, Dennis Lacey. Following Mr. Lacey’s remarks, he will take questions from buy and sell-side analysts.
Before the conclusion of today’s call, I’ll provide the necessary cautions regarding forward-looking statements made by management during this call. We would like to remind everyone this call is available for replay starting this evening via the link, provided in yesterday’s press release through November 14, 2018, and will also be available on the company’s website at investors.rgsenergy.com for the next 12 months.
Now, I would like to turn the call over to Chief Executive Officer of RGS Energy, Mr. Dennis Lacey. Please go ahead.
Thank you. The capstone of our efforts to reinvent RGS was put in place last week with the announcement that we received product certification from UL for POWERHOUSE 3.0. Clearly exciting news for us, and so much so, we announced it within 1 hour of receiving the letter from UL. This certification means that RGS is now a manufacturer. Further, it starts the nationwide commercial launch of POWERHOUSE, beginning a new era for our company, one that we believe will greatly benefit our shareholders. POWERHOUSE 3.0 is the product at the right time, allowing us to also operate outside the solar residential EPC space where many companies report operating losses.
Just like the format we used last quarter, the press release we issued yesterday lays it all out, including our results for the quarter, where we stand with POWERHOUSE reservations, how our expected future cash and capital position looks. Further within our financial in the press release, you can see hypothetical future earnings per share. I would like to move to address questions that seem to come up routinely for us. Our answers have not changed.
First off, we typically get asked, do we need to raise capital? No. We believe we do not need to do another capital raise, having raised all the capital we expect to be needed to commercialize POWERHOUSE. As you saw in yesterday’s press release, we expect to receive approximately another $3 million of cash as the remainder investor notes are converted to stock. We included these shares to be issued in the table illustrating our future expected fully diluted shares. In summary, that cash, along with the approximately $9 million of cash we reported at September 30, is why we do not believe we need to raise capital to commercialize POWERHOUSE.
Further, as we show on the press release, there is a potential for future cash of almost 20 million from the future exercise of common stock warrants. It is our belief that after the downward selling pressure on our stock from the note offering thesis, our stock price can rise to levels where common stock warrants are exercised.
Related to this is another question we often get, when will the overhang of shares from the 2018 convertible note offerings be gone? We have gone to considerable lengths to update our shareholders on the overhang, which is the number of shares that convertible note holders can request we issued to them to convert their notes. The amount of the overhang has been shown in the financial models we have been issuing as a component of the potential future diluted shares outstanding. Further on our company website under Investor Relations, we have been updating the number of shares outstanding, so you can calculate the overhang.
As of the end of today, the overhang from the 2018 convertible notes is now down to approximately 12 million shares. It is our belief that at the rate these note holders have been converting debt to equity, the overhang will be gone shortly. And as the selling pressure abates, we believe it creates a situation where our stock price can rise.
We’ve also been asked, do we plan to do a reverse stock split? No, we do not. Somewhat related to this, we are also asked, will you be in compliance with the NASDAQ requirement for minimum shareholders’ equity? As you can see in yesterday’s press release, our shareholders’ equity as of September 30 was approximately $7 million, which is in excess of the requirement of $2.5 million. One of the tables on the press release shows that we have recorded an increase in shareholders’ equity from October 1 to November 2 of $4.2 million from the noncash derivative accounting for our 2018 convertible notes and conversion of those notes into shares of RGS stock. On top of that increase in equity, Q4 to date, we expect to record another $4.5 million from the noncash accounting of derivatives. Basically, the note accounting is very complex, but to simplify, the issuance of the 2018 convertible notes cause us to book noncash losses up front that will simply reverse in future periods, creating increases to shareholders’ equity in those periods, which are coming now.
We are also frequently asked, are you taking deposits for POWERHOUSE-written reservations? No, we have not been doing that. Although other companies take money from customers for a product not available to fund their operations, we have never been comfortable with that as a business strategy. Our plan all along has been that once we receive the UL certification, we’ll begin to accept purchase orders from roofers and homeowners and we’ll require deposit with each purchase order. We are open for business now with POWERHOUSE and expect to receive purchase orders, ship product and record revenue. Related to that last question, we have also been asked, do we expect cancellations of the written reservations? We don’t expect roofers to cancel written reservations, but could not say that could not happen. Regardless, not only have we announced product certification, we believe that we will have more customer interest, not less. And point of fact, we announced last Friday we have $126 million of reservations. And then this Monday we announced $127 million, up $1 million over that short time frame, which we believe supports our view that we’ll have more customer interest. For our new era, we will be reporting traditional metrics for POWERHOUSE. That would mean showing a backlog roll forward schedule in our filings, a supplement we have included in our SEC filings for years. As such, we will not be reporting reservations any longer. It will be backlog represented by signed purchase orders and contracts not yet filled.
Another related question is, do we have written reservations from homebuilders? No. We have held the view that a homebuilder would not advertise a new community as having a product that has not yet received product certification because that would simply not be prudent. We anticipate now that with product certification, we will have increased homebuilder interest in POWERHOUSE leading to contracts. We also get questions about how we determine the gross margin percentages in the RGS financial model in our press releases. The gross margin percentages reflect the terms we have negotiated with our supply chain partners. Of course, like any business, there are macroeconomic factors that will affect the cost of imprints. There are 2 I would like to mention for POWERHOUSE. One is the price of oil. Because the base plate of POWERHOUSE is plastic and hydrocarbons are involved, significant movements in the price of oil can affect the pricing we receive for plastic resin. Another is foreign currency rates with China. As our solar laminate is made in China, the exchange rate with China can affect the pricing we receive for solar laminate.
And of course, we get asked, “What are your manufacturing capabilities? And how many megawatts would you do this quarter? How many megawatts would you do next quarter?” We provided guidance on October 1 with our updated corporate presentation that we expect revenue for the first quarter of 2019. That is still our opinion, although we may record some POWERHOUSE revenue during December. It is simply a matter of how quickly we can manufacture solar laminate, ship it from China, assemble it in the U.S. and then distribute POWERHOUSE kits over the remaining 50-plus days this year. Our stated view has been consistent on this topic. For instance, we have said it will be bumpy as we start to manufacture and balance product demand with our manufacturing capability. It will take a quarter or so to achieve an equilibrium source, but a good problem for us to have as we expect to be profitable.
Under these circumstances, we believe at this juncture, it will be imprudent to provide quarterly guidance of megawatts produced or solar revenue.
Related to that question, we also get asked, do we have the manufacturing lined up to cover the annual written reservations? Yes, we believe we have POWERHOUSE manufacturing capacity lined up to cover our current written reservations. To date, POWERHOUSE written reservations exceed $127 million in potential annual revenue. This is from 88 roofers across 32 states, more than half the states so far. Supporting my opening comment, this will be a national launch.
So let me summarize. We believe POWERHOUSE is the solar product that homeowners, roofers and homebuilders have been waiting for. We also believe our product stacks up extremely well against potential competition, as shown in various news publications that have compared our product to other solar shingles in the marketplace. We continue to believe we are in a unique position to be the first real mover in the solar shingle marketplace. With recent legislation like the California 2020 Solar Mandate and over $100 million in written reservations from roofing companies, we certainly are excited about the future for our company. We also see the opportunity for international expansion. We will pursue International Electrotechnical Commission testing to address the global market.
The commercial launch of POWERHOUSE is a major game change for us that we believe will drive strong growth and profits in 2019 for our shareholders. Now with that, I’d like to open it up to questions.
We will take our first question from Ishfaque Faruk with WestPark Capital.
First of all, congrats on the — receiving the UL certification, huge home run. My question is related to the gross margin. Dennis, you updated your deck again and it says that your gross margin percentages are now going to be in the low to mid-30s. So is it — is that just based on your conversations with the manufacturers? Or can you give a little more color on that?
Sure. If you were — the last one we issued for the financial model is in our October 1 corporate presentation that we filed under 8-K. And I think the margin in 2 of those periods might have increased by 1 percentage point, 100 basis points. So it wasn’t that much from the last time we did anything. But yes, to answer your question, this reflects the pricing we’ve got at this time.
And is that — so your current reservation is $127 million, right? But do you have a sense for what percentage of the reservations would actually translate into revenue in a given year?
Well, we’re certainly hopeful that all of that happens next year. We believe — the form that — the roofers, their reservations is for the 12-month period. So we like to believe we’re going to get that next year. I mean, things always happen differently in the full amount that they say. But like I said in my scripted comments, we expect other roofers to come along, and we expect homebuilders to come along. So we’re really in the early innings, I mean, we’re in early stages.
Okay, now with the UL certification in hand, when do you reasonably expect homebuilders to come onboard?
Well, I think the process with roofers is rather quick-turned. The time to negotiate contract with a homebuilder for a new community will be a little more involved process. So we certainly expect to see conversations commence shortly, but what subdivision will be ready for us in time. So we’re not really expecting a lot for — in terms of actual shipments in the first half of next year. But the second of half of next year, it gives us plenty of runway to meet that sort of need. We hope it’s faster but we don’t expect it right out of the box.
Okay, and my last question. Okay. So you briefly mentioned that you might — POWERHOUSE might generate some revenues in the December quarter. So do you have a sense for when will you start shipping your products? Do you have a time line for that?
Well, I hope — as I said in my scripted comments, I hope it’s December. That’s what we’re hoping for. Our earlier guidance was January for revenue. We — there’s only 50 days to go. And we’re jimmying up manufacturing now because we did not want to manufacture before we had UL approval. That would not be wise. That would be imprudent. So we’re jimmying it up now, we got 50 days to go, we’ll see what we can do.
[Operator Instructions] And at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Lacey. Sir, please proceed.
Thank you all again for joining us today, and we look forward to updating you on our progress in the future. Operator, please go ahead and wrap up the call.
Thank you. Before we end today’s presentation, I would like to take a moment to read the company’s safe harbor statement that provides important cautions regarding the forward-looking statements.
Today’s communication contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, including statements regarding RGS Energy’s results of operations and financial position and RGS Energy’s business and financial strategy. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they provide RGS Energy’s current beliefs, expectations, assumptions, forecasts and hypothetical constructs about future events and include statements regarding our future results of operations and financial position, business strategy, budget, projected cost, plans and objectives of management for future operations.
The words believe, plan, future, may, will, expect, anticipate, hypothetical, predict and estimate and similar expressions as they relate to us are intended to identify such forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at or by which such performances or results will be achieved, if at all.
Forward-looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Therefore, RGS Energy cautions you against relying on any of these forward-looking statements.
Key risks and uncertainties that may cause a change in any forward-looking statement or that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include: the ability to obtain requisite international product certifications of POWERHOUSE 3.0; RGS Energy’s ability to successfully conduct — commercialize POWERHOUSE 3.0 in future years to achieve market share; RGS Energy’s ability to satisfy the conditions and obligations under the POWERHOUSE 3.0 license agreement; RGS Energy’s ability to manage supply chain in order to have production levels and pricing of the POWERHOUSE 3.0 shingles to be competitive; the ability of RGS Energy to successfully expand its operations and employees and realize profitable revenue growth from the sale and installation of POWERHOUSE 3.0 and to the extent anticipated; RGS Energy’s ability to realize the revenue from sales of POWERHOUSE arising from the California Energy Commission’s mandate for solar systems with new homebuilding commencing in 2020; RGS Energy’s ability to realize revenue from written reservations for initial POWERHOUSE deliveries; RGS Energy’s ability to obtain future purchase orders for POWERHOUSE deliveries; competition in the in-built photovoltaic solar system business; RGS Energy’s ability to successfully and timely expand its POWERHOUSE 3.0 business outside of the United States; foreign exchange risks associated with the POWERHOUSE 3.0 business; intellectual property infringement claims and warranty claims related to the POWERHOUSE 3.0 business; the performance of solar division; cost and availability of raw materials including the impact from the changes in the price of oil and the foreign currency exchange rate for Chinese yuan; RGS Energy’s ability to successfully implement its revenue growth strategy, achieve its target levels of sales, generate cash flow from operations and achieve breakeven and better results; the adequacy and access to capital necessary to implement RGS Energy’s revenue growth strategy; RGS Energy’s ability to satisfy the conditions to receive additional funds underlying the investor promissory note received in the 2018 convertible note offering; RGS Energy’s ability to satisfy equity conditions and other covenants in the transaction documents for the 2018 convertible note offering; whether RGS Energy will receive any proceeds from exercise of common stock warrants; rules, regulations and policies pertaining to electricity pricing and technical interconnection of customer-owned electricity generation such as net energy metering; the continuation and level of government and utility incentives for solar energy; changes in general economic, business and political conditions, including tariffs on imported solar cells and changes in the financial markets; noncompliance with NASDAQ continued listing standards; the impacts on future hypothetical earnings per share of future employee incentive compensation by cash bonuses and stock option awards; the future trading price of RGS Energy’s Class A common stock; the number of outstanding shares of RGS Energy’s Class A common stock; future shareholders’ equity; and other risks and uncertainties included in the company’s filings with the Securities and Exchange Commission.
You should read the section entitled Risk Factors in RGS Energy’s 2017 annual report on Form 10-K and in its quarterly report on Form 10-Q for the quarters ended March 30, 2018, June 30, 2018 and September 30, 2018, each of which has been filed with the Securities and Exchange Commission, which identify certain of these and additional risks and uncertainties. Any forward-looking statements made by RGS Energy in this communication speak only as of the date of this communication. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for RGS Energy to predict all of them. RGS Energy does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
POWERHOUSE is a trademark of The Dow Chemical Company, under used license. RGS Energy is the company’s registered tradename. The company files periodic and other reports with the Securities and Exchange Commission under its official name, Real Goods Solar, Inc.
I would now like to remind everyone, this call will be available for replay through November 14, 2018. Please refer to yesterday’s press release for dial-in and replay information. A webcast replay will also be available via the company’s website at investors.rgsenergy.com.
Thank you for joining us today. This concludes today’s presentation. You may now disconnect.