TECOGEN INC. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; filed November 9, 2017. Tecogen designs and sells commercial and industrial cogeneration equipment and services. After acquiring American DG Energy (ADGE) on May 18, 2017, it also reports energy production from systems operated under long-term customer contracts. Comparisons with 2016 do not include ADGE in Tecogen’s results for the comparable periods.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $8.50 million | $6.62 million | $22.94 million | $17.38 million |
| Gross profit | $3.26 million | $2.77 million | $9.16 million | $6.60 million |
| Income (loss) from operations | $85,539 | $249,493 | $(82,618) | $(1.04) million |
| Net income (loss) attributable to Tecogen | $27,211 | $207,868 | $(221,544) | $(1.10) million |
| EPS, basic and diluted | $0.00 | $0.01 | $(0.01) | $(0.06) |
- Q3 consolidated gross margin was approximately 38.3%. Management reported Products and Services segment gross margin of 34.9%, down from 41.9%, citing product mix; Energy Production gross margin was 53.5%.
- For the first nine months, consolidated gross margin was approximately 39.9%, versus 37.9%. Products and Services segment margin was 38.3%, compared with 38.0%; Energy Production margin was 54.8%, which management attributed partly to seasonality and a retroactive rate change that reduced fuel costs.
- Revenue increased 28.5% in Q3 and 32.0% for the nine months. Q3 product revenue fell 14.9%, while service revenue rose 20.0%; nine-month product and service revenue rose 10.9% and 24.4%, respectively. Energy Production contributed $1.56 million in Q3 and $2.33 million from the post-acquisition period through September.
- Cash used in operations was $2.00 million for the nine months, versus $2.91 million in 2016. Cash and equivalents were $2.08 million at September 30, down $1.64 million from year-end 2016. Management cited slower collections and inventory pre-buying; accounts receivable and inventory were $11.09 million and $6.12 million.
- Working capital was $14.19 million, compared with $14.44 million at December 31, 2016. Total assets were $56.63 million and total liabilities $23.29 million.
- Debt included a $3.15 million senior convertible promissory note and an $850,000 related-party loan, which bears 6% interest and matures May 25, 2018. The filing does not provide a clear consolidated total for interest-bearing debt.
Material changes and unusual items
- The ADGE merger consideration included 4,662,937 Tecogen shares valued at $18.75 million and assumed equity awards valued at $114,896. The acquisition added energy systems, customer contracts, and long-term contracted revenue, and resulted in $12.60 million of excess purchase cost over fair value of net assets. Valuations, including the acquired contract assets and liabilities, remained provisional.
- The acquisition added $10.36 million of net unfavorable contract liability and $2.43 million of intangible assets. Contract amortization produced a net credit to cost of sales of $428,264 for the nine months.
- Nine-month results included $156,298 of merger-related expenses; Q3 included $37,445. Shares outstanding increased to 24.72 million from 19.98 million at year-end, substantially reflecting the merger issuance.
- EuroSite Power securities were valued at $334,570 at September 30, with a $184,998 nine-month unrealized loss in other comprehensive income. Q3 included an unrealized gain of $39,361.
- Backlog of product and installation projects was $14.5 million: $11.5 million in purchase orders and $3.0 million in projects with firm verbal commitments. The company reported 93 operational energy systems. Management cautioned that backlog is not necessarily indicative of future performance.
Outlook, risks and contingencies
- The filing gives no quantified earnings or revenue guidance. Management described expectations for cash requirements and future financing, but provided no specific forecast. It noted seasonal demand patterns for heating, cooling, and service work.
- Management identified slower customer collections and higher inventory as uses of cash. It expects inventory to fluctuate with production and delivery requirements. Energy Production revenue depends on output, utility-linked pricing formulas, and customer demand; acquired contracts may be less profitable because utility rates and billed volumes have been lower than originally expected.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses in IT general controls and revenue-recognition controls at the newly acquired ADGE. Management said remediation would proceed as resources become available.
- A federal shareholder class action challenges merger disclosures and alleges fiduciary-duty violations. Defendants moved to dismiss; the court had not ruled. The company considers the case without merit, but said damages and the likelihood of an unfavorable outcome were not reasonably estimable.
- Tecogen gave notice in September to terminate its TTcogen joint venture agreements, citing an alleged material, incurable breach by Tedom or its affiliate; dissolution or a new arrangement remained under discussion. Separately, on October 24, shareholders voted to dissolve Ultra Emissions Technologies. Tecogen said it expects return of its $2.0 million investment after liquidation and agreed to buy the venture’s assets for $400,000. These were subsequent events, not reflected as completed transactions in the September 30 financial statements.
- Tecogen guaranteed certain EuroSite Power obligations, including approximately $301,000 of equipment-financing principal and certain contract performance obligations. Management did not consider payment probable and recorded approximately $10,000 for the non-contingent guarantee element.
- Newly added risks include potential liability for energy-system failures or customer obligations, loss of revenue and equipment-removal costs as customer contracts expire, weather-related changes in energy demand, and reduced cogeneration demand if government incentives expire or are withdrawn.
Key facts for investors to verify
- Whether acquired ADGE contracts and energy systems deliver sustainable cash flow and margins as contract terms, utility rates, and volumes change.
- Collection timing, working-capital needs, cash runway, and any financing required to support operations.
- Final acquisition valuations, including the unfavorable contract liability, acquired intangibles, and recorded excess purchase cost.
- Progress remediating the disclosed internal-control material weaknesses, particularly revenue recognition and IT controls.
- Outcomes of the merger litigation, TTcogen wind-down or restructuring, and the Ultra Emissions Technologies liquidation and asset purchase.
- Conversion, repayment, and maturity terms for outstanding related-party and convertible debt, and the potential effect of dilution.