TECOGEN INC. — Q3 2021 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Tecogen designs and sells commercial and industrial cogeneration and chiller systems, provides installation and maintenance services, and sells energy under long-term customer contracts.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $5.02 million | $7.20 million | $17.22 million | $22.60 million |
| Gross profit / margin | $2.34 million / 46.7% | $2.79 million / 38.7% | $8.14 million / 47.3% | $8.48 million / 37.5% |
| Operating income (loss) | $(0.91) million | $(0.21) million | $(1.36) million | $(1.82) million |
| Net income (loss) attributable to Tecogen | $1.47 million | $(0.23) million | $3.63 million | $(2.09) million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $0.17 million | $1.41 million |
- Revenue mix and trends: Q3 products and services revenue fell 31.2% to $4.70 million; energy production revenue fell 14.5% to $0.32 million. For the nine months, products and services declined 25.1% to $15.88 million and energy production declined 4.0% to $1.34 million.
- Costs and margins: Gross margin improved year over year in both periods. Management attributed this to higher product prices and lower warranty costs, plus a mix shift toward higher-margin maintenance services. Operating expenses rose 8.6% in Q3, but declined 7.9% for the nine months.
- Cash and liquidity: Cash was $3.35 million at September 30, up from $1.49 million at year-end 2020. Working capital was $16.45 million, versus $13.38 million. Nine-month investing cash use was $0.19 million and financing cash provided was $1.87 million, from the Second Draw PPP loan before its forgiveness.
- Debt and liabilities: No note payable remained at quarter-end; both PPP loans were forgiven. Current liabilities were $8.24 million. Lease obligations totaled approximately $2.11 million, and deferred revenue totaled approximately $2.10 million.
Material changes and unusual items
- Revenue declined 30.3% in Q3 and 23.8% in the first nine months. Lower cogeneration sales and installation revenue were major drivers; Q3 product shipments were also affected by supply-chain delays. Maintenance revenue increased 5.9% in Q3 and 14.3% year to date.
- Although Tecogen reported net income, it recorded operating losses in both 2021 periods. Net income included $1.89 million of Q3 PPP loan-forgiveness income and $0.56 million of employee retention credit (ERC) benefits. For the nine months, debt-extinguishment gains totaled $3.77 million and ERC benefits totaled $1.28 million. These items substantially contributed to reported profitability.
- Inventory increased to $7.92 million from $7.17 million at year-end, which management linked partly to supply-chain issues delaying shipments. Operating cash flow fell to $0.17 million from $1.41 million year over year, despite positive net income.
- Backlog was $8.1 million at September 30, including $6.0 million in purchase orders and $2.1 million in projects with firm verbal commitments. The filing cautions that backlog is not necessarily indicative of future performance.
Outlook, risks and controls
- Management said current resources, operating cash flows, anticipated ERC and PPP-related funds were expected to meet working-capital needs for the next 12 months; beyond that, Tecogen needs sufficient operating cash flow and may require debt or equity financing. The filing provides no specific revenue or earnings guidance.
- Management described COVID-19 effects as uncertain, including customer closures and delayed payments, reduced service and installation activity, and lower energy production at affected sites. Supply-chain delays also affected product sales.
- Some energy-production sites were not fully operational or had permanently closed. Tecogen also has contractual obligations tied to certain energy assets sold in 2019, including potential shortfall reimbursements and other guarantees; management did not consider amounts probable under the disclosed EuroSite guarantees.
- Disclosure controls and procedures were assessed as ineffective because of a material weakness involving general IT controls and a small number of individuals. Management said remediation steps were underway as resources became available.
- The filing reports no material pending legal proceedings and no material subsequent events. Management stated there were no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue, shipments and backlog convert into improved operating results, particularly after supply-chain delays and lower installation activity.
- Whether positive cash generation can be sustained: nine-month operating cash flow was only $0.17 million despite $3.63 million of attributable net income.
- The timing and collection of the $1.28 million ERC receivable and the extent to which future earnings depend on government credits or other nonrecurring items.
- Progress in remediating the disclosed IT-controls material weakness.
- Potential cash exposure under energy-contract guarantees and the performance of sites that are not fully operational or have closed.