Former high flying solar energy systems installer RGS Energy (NASDAQ:RGSE) reported its results for the fourth quarter and for the full year 2015 this past Friday.
The company's fourth quarter results pretty much mirrored the trends previously witnessed over the course of 2015 with ongoing decreases in revenues and backlog accompanied by major losses on the bottom line.
RGSE's inadequate financial resources have also been an ongoing theme for quite some time now that already led to some painfully dilutive financing rounds in the past.
The company's fiscal year 2015 results clearly reflect the ongoing challenges. RGSE mainly worked off its long-standing backlog but did not generate meaningful new business effectively calling the company's ability to operate as a going concern into question.
But management reported some progress on the financing front during Q1/2016 as the company's largest distributor, Solar Solutions and Distribution LLC (Solar Solutions), recently agreed to acquire the company's existing revolving credit line from Silicon Valley Bank and to moreover provide significant covenant relief effectively enabling RGSE to again borrow against the facility up to a current maximum amount of $5 million. The credit facility is maturing in 12 months with the maximum borrowing amount decreasing to $4 million on October 1, 2016 and $3 million on January 1, 2017.
Furthermore RGSE last Friday entered into a new $10 mln convertible debt financing agreement with some specialized hedge fund investors providing some much needed fresh capital:
As a result of our recent financing activities, we believe we have access to sufficient financial capital to continue our business turnaround strategy," said Alan Fine, principal financial officer of RGS Energy.
Unfortunately the terms of the new financing are pretty much onerous and will deliver another huge blow to the company's already badly stricken investors in form of severe dilution. In fact, RGSE had to agree to just another so-called "death spiral financing" with the financing terms effectively incentivizing the creditors to immediately short the company's common shares:
On April 1, 2016, we completed a private placement (the "2016 Offering") of $10.0 million in principal amount of Senior Secured Convertible Notes due on April 1, 2019 (the "Notes") with unaffiliated institutional investors. The 2016 Offering will result in gross proceeds of $10.0 million, before placement agent fees and other expenses associated with the transaction. We received $0.75 million of the proceeds from the sale of the Notes at closing of the 2016 Offering in unrestricted cash. The remaining $9.25 million of the proceeds is held in five separate collateral accounts each subject to a Deposit Account Control Agreement between the Bank of Hawaii, the Company, and the applicable investor. The Notes provide for distribution of the proceeds held pursuant to the Deposit Account Control Agreement on certain dates as detailed in Note 9. Shareholders' Equity.
The amount released pursuant to the Notes and Deposit Account Control Agreement on each of these dates will be reduced to an amount equal to the lesser of the value of the shares of Class A common stock
(NYSE:I) covered by an effective resale registration statement,
(ii) the Note holders are eligible to resell under Rule 144, or
(NASDAQ:III) eligible for issuance under the Nasdaq continued listing rules without shareholder approval, until we have obtained such shareholder approval, if applicable, based on the conversion formula in the Notes.
All amounts outstanding under the Notes mature and are due and payable on or before April 1, 2019. Prior to maturity, the Notes bear interest at 8% per annum (or 18% per annum during an event of default) with interest payable monthly in arrears on the Installment Dates (as defined below) and on conversion dates.
The Notes are convertible at any time, at the option of the holder, into shares of Class A common stock at the lower of a fixed and floating conversion price. The initial fixed conversion price is $0.8033 per share, subject to adjustment for stock splits, stock dividends, and the like.
The floating conversion price is equal to the lowest of
85% of the arithmetic average of the five lowest volume-weighted average prices of the Class A common stock during the 20 consecutive trading day period ending on the trading day immediately preceding the delivery of the applicable conversion notice by such holder of Notes,
(ii) 85% of the volume-weighted average price of the Class A common stock on the trading day immediately preceding the delivery of the applicable conversion notice by such holder of Notes, and
85% of the volume-weighted average price of the Class A common stock on the trading day of the delivery of the applicable conversion notice by such holder of Notes. In no event may the conversion price be less than $0.25 per share. If the conversion price to be used for calculating the shares of Common Stock issuable would have been less than $0.25 per share but for such limitation, the Company is obligated to issue shares of Common Stock at a conversion price of $0.25 and pay cash to the Note holders in an amount calculated pursuant to formulas set forth in the Notes.
On the last business day of each month (the "Installment Dates"), commencing on the date July 29, 2016, we will pay the holder of the Notes an amount equal to
(1) $312,500 (1/32nd of the original principal amount of such holder's Note) or the principal outstanding on the Installment Date, if less, plus
(2) the accrued and unpaid interest with respect to such principal, plus
(3) the accrued and unpaid late charges (if any) with respect to such principal and interest. Each monthly payment may be made in cash, in shares of Class A common stock, or in a combination of cash and shares of Class A common stock.
Additionally RGSE issued warrants to the new investors exercisable into an aggregate of roughly five million shares of common stock. But given the sheer amount of shares to be potentially issued upon conversion of the notes investors won't need to worry about the potential additional dilution from warrant exercises.
Given the fact that for example the new investors will be able to convert their notes at "85% of the arithmetic average of the five lowest volume-weighted average prices of the Class A common stock during the 20 consecutive trading day period ending on the trading day immediately preceding the delivery of the applicable conversion notice by such holder of Notes," disaster for existing shareholders will be an absolute certainty going forward.
In its 10-K the company states, it "has reserved up to 61,500,000 shares of Class A common stock to issue upon conversion of the Notes". If fully utilized the average conversion price would calculate to $0.162 despite a fixed conversion floor of $0.25. The difference can be explained by the company's ability to pay installments and interest expenses in common shares instead of cash.
Current RGSE shareholders should have no illusions about the future direction of the company's share price, the hedge funds involved in the recent financing will literally short the hell out of the shares going forward only to cover their positions later with cheap shares from opportunistic note conversions.
Adding 61.5 million potential new shares to the company's existing share count of 12.5 million would dilute existing shareholders by close to 85%.
Suffice to say, investors should expect the share price to approach the conversion floor price of $0.25 within short notice and RGSE to conduct another reverse split until June 20, 2016 in order to comply with the Nasdaq's minimum bid-price rule as the company was already noticed on the deficiency on December 23, 2015.
Investors should also notice that cash fees of roughly $0.6 million will have to be paid to the placement agent, Roth Capital Partners LLC (ROTH) in conjunction with the new offering. Moreover roughly 850,000 warrants will be issued to Roth.
The 10-K also contained other issues like the refusal of RGSE's insurance carrier to cover $2 million in litigation expenses so far related to the ongoing SEC investigation of the company. Moreover the insurance carrier has been reserving the right to recoup all amounts previously advanced to the company with this regard.
Lastly investors will have to prepare for a really ugly Q1/2016 given this statement from the press release:
Given we did not close these financings in the time frame we had anticipated, our operating results for the ensuing period will reflect the lack of access to adequate capital during that period.
As usual RGSE shareholders will pay for the company's ongoing inability to get its business back on track and this time the price will be truly brutal.
The recent death spiral financing will result in the new creditors aggressively shorting the company's shares down close to the conversion floor level of $0.25 to maximize their profits under the financing agreement. As a consequence RGSE will be required to conduct another reverse split before June 20, 2016.
The potential dilution to existing equityholders calculates to almost 85%.
Lastly, it remains far from certain that RGSE will finally turn around its business without requiring further capital injections or at all.
The company's execution over the past few years has been truly underwhelming and given the highly competitive environment and RGSE's already pretty much tarnished reputation with both suppliers and customers I am actually having a hard time envisioning the company finally getting its act together going forward.
Investors should sell out their remaining positions regardless of potential losses as things will in fact get much worse going forward.
Quite contrary to the hedge funds involved in the recent financing transaction most investors will have a hard time to follow suit as RGSE's shares are usually very difficult to borrow, so unfortunately there's very little opportunity for Seeking Alpha readers to profit from this almost impeccable set-up.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in RGSE over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.