RGS realigns to focus on in-roof solar shingles

Denver-based Real Goods Solar Inc.'s first-quarter launch of Powerhouse 3.0 solar roof shingles was even tougher than expected, but a multi-pronged plan to energize sales and turn a profit for the struggling company is underway.

Despite International Builders' Show accolades for its attractive, dual-purpose product, which lies flush with the roof and acts as both a shingle and source of energy, Powerhouse sales have been in the basement, in part because roofers have had a backlog of projects caused by a skilled labor shortage.

Powerhouse goes to market through a national network of roofers, which currently stands at 250 roofers in 40 states. The company, which does business as RGS Energy, offered discounts in the first quarter to spur sales but to no avail.

"Until the local roofers close out their backlog they are not prepared to sell new product," CEO Dennis Lacey said in an April 15 conference call.

In the meantime, the 41-year-old company is realigning its business resources and doing what it can to conserve cash. Going forward, all focus is on Powerhouse as the main component of a revenue growth strategy aimed at finally operating at a profit.

In 2018, RGS incurred net losses and had an accumulated deficit of $243 million as of Dec. 31, according to its annual form 10-K filed April 15 with the U.S. Securities and Exchange Commission. Both the company's accounting firm and management have "substantial" doubts about RGS continuing as a going concern and all bets are being placed on Powerhouse to increase sales and achieve profitability.

With a good-looking product that is easy to install and a chance to cash in on California's mandate that all new homes built in 2020 include a solar installation, Lacey sees opportunity on the horizon.

The 65-year-old CEO reduced his contractual-based pay by 50 percent, he said, to demonstrate his personal commitment to the future of the company, which has a 40-year track record of financial struggles. SEC filings show his salary as $375,972 plus option rewards of $211,600.

Founded in 1978, RGS says it sold the first solar photovoltaic panels in the U.S. and has since designed and installed more than 26,000 residential and commercial solar energy systems in the continental U.S. and Hawaii. However, Lacey said RGS hasn't been profitable.

"We have been in the solar industry for over 40 years and have not made money. In fact, we have consistently lost money," he said on the call. "When it became certain we had a product to distinguish ourselves — that product being Powerhouse — and we started manufacturing and commercializing during the first quarter, it seemed like a prudent time to take stock of our situation and assess whether there is a better way to enhance shareholder value."

To that end, RGS announced March 29 that it was exiting its traditional residential solar module and racking business on the mainland U.S. after it lost $5.5 million in 2018.

This business unit provided design, engineering, financing, permitting, installation and maintenance services using components purchased from manufacturers and distributors.

"By exiting the mainland residential solar business we're now able to approach other traditional solar installers to offer Powerhouse solar shingles to their customers, which only serves to expand our efforts," Lacey said on the call.

RGS is retaining two parts of its legacy business: sales of solar modules for commercial uses and a Hawaii-based subsidiary called Sunetric.

"This realignment is expected to result in the reduction of workforce payroll plus burden of approximately $4 million annually," RGS says in the form 10-K.

RGS management and the board also have bought a significant number of shares as company officials and investors hold hope that some of the written non-binding reservations from roofing companies turn into final sales.

In November, the company said it had received more than $127 million in written reservations from roofing companies.

Production of Powerhouse 3.0 shingles has been outsourced to contract manufacturers, including injection molders Creative Liquid Coatings Inc. in Kendallville, Ind., and Revere Plastic Systems LLC in Clyde, Ohio.

The shingles use polypropylene for the composite base structure from General Polymers Thermoplastic Materials LLC of Clarkston, Mich., and solar components and wire harness connectors from Ningbo, China-based Risen Energy Co. Ltd.

The company says Powerhouse shingles are ideal for homeowners needing to replace their roof because of its age or due to some calamity such as a fire or severe weather.

"We estimate that when compared to a traditional rack-and-mount solar system, the Powerhouse product will be somewhat less expensive than a similarly sized system," Lacey said.

However, if the homeowner doesn't need a new roof, Powerhouse will be a little more expensive than the traditional rack and mount system. That's because removal of the existing roof adds an incremental cost.

Still, Lacey expects some homeowners to pay the difference for Powerhouse because it looks better.

"After all, curb appeal does matter," he added.

For homeowners filing an insurance claim for a damaged roof, the value proposition is even better, Lacey said.

"The insurance proceeds pay for the installation of Powerhouse and a homeowner has new roof that will allow them to earn money from electrical savings as their Powerhouse roof is producing power, offsetting the homeowner's electrical bills," he said.

RGS will use local roofing companies to distribute Powerhouse, which is a similar strategy employed by Dow Inc., which developed the technology and licensed it to RGS.

"When local roofers bid for a new roof, our strategy is to also offer Powerhouse," Lacey said. "That allows them to distinguish themselves from competitors. By offering Powerhouse products, they create additional value for the homeowners with little or marginal costs as roofing companies look for an edge themselves in a highly commoditized marketplace."

If each of the 250 roofers could get one customer a month to select the Powerhouse product that would equate to roughly $57 million in annual revenue, Lacey said, adding the revenue estimation is based on the previously disclosed price of roughly $19,000 for a 6-kilowatt system.

Roofers can mark up the equipment and labor to improve their profits, Lacey added.

"It makes sense to pitch Powerhouse to customers," he said.

RGS also has undertaken a marketing program to build awareness of the Powerhouse brand. In addition to attending 12 home shows and builder expos in nine states since October, RGS signed up for time on two television shows. There will be a 20-minute spot on a PBS show called Information Matrix and a 30-minute spot on the Lifetime Network's Designing Spaces.

"Television is the most expensive media outlet to market," Lacey said. "We signed up for two spots at this time to test the effectiveness of this marketing channel while being prudent from a cost perspective."

In addition, RGS is taking steps to help roofers sell Powerhouse with a mobile sales training program.

"Roofers who have attended these sessions have remarked that it's as easy as Legos," Lacey said.

RGS also is giving roofers a digital tool to provide job quotes, proposals and purchase orders; and, a design tool that downloads a satellite image of the customer's roof to configure a Powerhouse system design and provides a visual for installation planning.

"Lastly it helps them with pricing the system for their customers and ordering the Powerhouse kit from us," Lacey said. "It has been months in development and is coming online now."

RGS officials had hoped to obtain Underwriter Laboratory's product approval earlier in 2018 to start Powerhouse commercialization efforts before the first quarter of 2019.

"We know solar is a very cyclical business," Lacey said. "It plays out the same for us every year. The second and third quarters are the best. The fourth is next best and the first quarter was the worst."

Near the end of the first quarter, on March 7, RGS officials announced they would explore more strategic alternatives, such as a sale of the company, merger or investment financing, but would not disclose any developments until the board approved a course of action.

For now, Lacey said the good news is that RGS is entering the traditionally better seasons for solar and he knows roofers are bidding on new jobs with Powerhouse.

"If roofers work through their backlog, we should see a momentum increase in the deployment of the Powerhouse product," he added.

Lacey is cautiously optimistic for other reasons, too.

"What we have here is a product that has recently won awards in a segment with limited competition with regulatory tailwinds that are supportive of a product like Powerhouse," Lacey said. "There's a growing nationwide network of local roofers, a customer solution engineered to be priced more competitively than other offerings, and to boot, we've taken the necessary steps to curtail our historical cash outflows."

RGS must sell 50 megawatts of Powerhouse 3.0 in-roof shingles during the first five years after obtaining UL certification. Otherwise, Dow has the right to amend the license to be non-exclusive and grant rights to others to sell Powerhouse and use the associated intellectual property.