TECOGEN INC. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Tecogen designs and sells cogeneration and chiller systems, provides installation and maintenance services, and sells energy under long-term customer contracts. Financial statements are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $6.62 million | $5.02 million | $20.47 million | $17.22 million |
| Gross profit / margin | $2.89 million / 43.7% | $2.34 million / 46.7% | $8.69 million / 42.4% | $8.14 million / 47.3% |
| Operating income (loss) | $(0.21) million | $(0.91) million | $(0.95) million | $(1.36) million |
| Net income (loss) attributable to Tecogen | $(0.26) million | $1.47 million | $(1.02) million | $3.63 million |
| Basic loss per share | $(0.01) | $0.06 income | $(0.04) | $0.15 income |
Q3 revenue increased 31.9% year over year, primarily from product sales (+71.4%, led by chillers) and service revenue (+8.8%). For the first nine months, revenue rose 18.9%; product revenue increased 57.7%, while service revenue declined 4.2% and energy production revenue declined 5.3%. Management cited lower installation activity, site closures, and seasonality as factors affecting those segments.
Higher material costs weighed on margins: total gross margin fell 3.0 percentage points in Q3 and 4.9 points for the nine-month period. Nine-month product gross margin declined to 33.7% from 44.1%; services margin improved to 52.2% from 50.4%. Operating losses narrowed, but 2021 net income benefited materially from PPP loan forgiveness and Employee Retention Credit (ERC) income that did not recur in 2022.
Cash, liquidity, and balance sheet
- Cash was $2.88 million at September 30, 2022, down $0.73 million from year-end 2021. Nine-month operating cash flow was $(0.43) million; investing cash flow was $(0.30) million; financing cash flow was zero.
- Working capital was $15.55 million, versus $16.19 million at December 31, 2021. Inventory increased by $0.95 million, which management attributed to increased safety stock.
- Total assets were $30.07 million and total liabilities $9.71 million. The filing reports no outstanding borrowing; the PPP loans were forgiven in 2021. Lease obligations totaled $1.47 million, including current and long-term amounts.
- An ERC receivable of $0.71 million remained outstanding. The company had received the third-quarter 2021 ERC payment and was awaiting payment for first- and second-quarter 2021 claims.
Outlook, commentary, and risks
- Management said existing resources, operating cash flows, and anticipated ERC receipts should meet working-capital needs for the next 12 months. Beyond that period, Tecogen expects to need sufficient operating cash flow and may need debt or equity financing if cash generation is inadequate.
- Product and installation backlog was $6.9 million at September 30: $2.7 million in purchase orders and $4.2 million in projects with firm verbal commitments undergoing order execution. The company cautioned backlog is not necessarily indicative of future performance.
- Tecogen established NetZero Greens, a controlled-environment agriculture initiative. It also expects a hybrid air-cooled chiller prototype by Q1 2023 and anticipates incremental revenue in 2024; these are forward-looking expectations, not guarantees.
- Management cited COVID-related supply-chain disruption, order delays, parts shortages, inflationary material costs, and uncertainty around energy prices. Higher natural-gas prices could pressure energy-production economics, while higher electricity prices could improve customer savings from Tecogen products.
- Disclosure controls and procedures were deemed ineffective because of a material weakness involving IT general controls and reliance on a small number of individuals. Management said it was taking remediation steps as resources become available.
- The company reported no material pending legal proceedings and no material subsequent events. It stated that it did not expect material payments under a legacy energy-contract cash-flow guarantee as of September 30, 2022.
Important facts for investors to verify
- Whether product growth can be sustained and whether material-cost pressure eases enough to restore product and consolidated gross margins.
- Actual cash conversion, inventory requirements, and progress toward management’s 12-month liquidity expectation.
- Collection timing of the remaining $0.71 million ERC receivable.
- Conversion of the $6.9 million backlog, particularly projects supported by verbal commitments, into orders and recognized revenue.
- Progress and spending for the chiller and NetZero Greens initiatives, and whether stated prototype and revenue timelines remain achievable.
- Remediation of the disclosed IT-controls material weakness and any updates to the company’s risk disclosures.