Business context and reporting period
Tecogen Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company designs and sells commercial and industrial cogeneration and chiller systems, provides installation and maintenance services, and sells energy through customer-site systems under long-term contracts. Its three segments are Products, Services, and Energy Production.
Financial performance and position
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Revenue | $6.41 million, up 4.4% year over year | $13.85 million, up 13.5% |
| Gross profit / margin | $2.70 million / 42.1%, versus $2.84 million / 46.3% | $5.79 million / 41.8%, versus $5.79 million / 47.5% |
| Operating loss | $817,000, versus $310,000 | $736,000, versus $449,000 |
| Net income (loss) attributable to Tecogen | $(856,000), versus $400,000 | $(767,000), versus $2.17 million |
| Operating cash flow | $(579,000) for the six months, versus $(104,000) |
Product revenue rose 23.1% in Q2 and 52.1% for the first half, led by chiller and cogeneration sales. Services revenue fell 8.4% in Q2 and 9.7% for the first half, mainly because installation work declined; Energy Production revenue declined 4.5% and 8.6%, respectively, partly due to permanently closed sites and seasonality.
At June 30, cash was $2.83 million, down $783,000 from year-end; working capital was $15.64 million. Total assets were $30.33 million and total liabilities $9.79 million. The balance sheet reports no notes payable; lease obligations totaled $1.64 million, including current and long-term amounts. Six-month investing cash outflow was $204,000, and financing cash flow was zero.
Material changes versus the prior comparable period
- Higher product sales lifted revenue, but product gross margin fell to 33.0% for Q2 and 32.9% for the first half, from 43.1% and 43.9%, respectively. Management attributed the decline and lower overall gross margins to increased material costs and inflation.
- Operating expenses increased 11.7% in Q2 and 4.6% for the first half. Management cited higher salary costs, taxes, and air-cooled chiller development costs.
- Comparisons of net results are affected by prior-year one-time income: Q2 2021 included $713,000 of Employee Retention Credit (ERC) income; first-half 2021 also included $1.89 million of PPP loan forgiveness income. Both PPP loans were subsequently forgiven; the filing reports no borrowing balance.
- Cash used in operations increased year over year. Inventory increased $438,000, which management attributed to higher safety stock; deferred revenue and accounts payable movements also affected operating cash flow.
Outlook, commentary, risks, and unusual items
- Management expects existing resources, operating cash flows, and anticipated ERC receipts to cover working capital needs for the next 12 months. Beyond that period, the company says it must generate sufficient operating cash or may need debt or equity financing.
- Product and installation backlog was $10.7 million at June 30: $3.8 million of purchase orders and $6.9 million of projects with completed customer internal approvals, allocated funding, and firm verbal commitments. The filing cautions that backlog is not necessarily indicative of future performance.
- The company began developing a hybrid air-cooled chiller in 2021, expects a prototype by Q1 2023, and anticipates incremental revenue in 2024. These are forward-looking expectations, not guarantees.
- An ERC receivable of $713,269 remained at June 30. Tecogen received $564,027 plus accrued interest in April 2022 for its third-quarter 2021 claim and was still awaiting payment for first- and second-quarter 2021 claims.
- Management described potential continuing effects from COVID-19 on customer orders, service activity, and energy production. It also cited inflation and supply-chain challenges; higher natural gas prices related to the war in Ukraine could affect Energy Production, while higher electricity prices could increase customer savings from Tecogen’s products.
- Management concluded disclosure controls and procedures were ineffective due to a material weakness involving general IT controls concentrated among a small number of individuals. Remediation is underway as resources become available. No material pending legal proceedings or material subsequent events were reported.
Important facts for investors to verify
- Whether product margins recover as material-cost pressures and product mix change, and whether the reported sales growth converts into profitable results.
- Timing and collection of the remaining ERC receivable, and the assumptions behind management’s 12-month liquidity assessment.
- Quality and conversion of the $10.7 million backlog, especially the $6.9 million supported by firm verbal commitments rather than purchase orders.
- Progress and costs of the air-cooled chiller development, including whether the stated prototype and revenue timelines remain achievable.
- Progress in remediating the material weakness in IT general controls and any resulting changes in disclosure controls.