TECOGEN INC. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are to Q1 2020 unless stated otherwise. Tecogen designs, manufactures and sells commercial and industrial cogeneration and chiller systems, provides installation and maintenance, and sells energy under long-term customer agreements. Its reporting segments are Products and Services and Energy Production.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Revenue | $6.06 million | $7.96 million, down 23.9% |
| Gross profit / margin | $2.95 million / 48.7% | $2.79 million / 35.1% |
| Operating income (loss) | $(0.14) million | $(1.12) million |
| Net income (loss) attributable to Tecogen | $1.77 million; $0.07 per diluted share | $(1.20) million; $(0.05) per diluted share |
| Operating cash flow | $0.37 million | $1.12 million |
| Cash and cash equivalents | $3.71 million | $1.49 million at December 31, 2020 |
| Working capital | $16.11 million | $13.38 million at December 31, 2020 |
| Debt | $1.87 million long-term note payable; no current note payable | Prior $1.87 million PPP loan forgiven in Q1 2021 |
Total assets were $31.60 million and total liabilities were $12.53 million at March 31, 2021. The company received $1.87 million from a new PPP Second Draw loan in February. Cash rose by $2.22 million during the quarter, while operating activities generated $0.37 million. Investing activities used $0.03 million.
Material changes and drivers
- Revenue fell $1.91 million. Products and Services revenue declined 25.1%; Energy Production revenue declined 13.0%.
- Product revenue decreased 30.4%, primarily because cogeneration sales fell with lower unit volume; higher chiller and engineered-accessory sales partly offset the decline. Installation revenue fell 69.4%, while maintenance revenue rose 12.1%.
- Management attributed lower installation and energy-production activity to COVID-19-related project stoppages, customer closures, and reduced activity at hotel, athletic and education sites. Customer payment delays also continued.
- Gross margin increased 13.6 percentage points. Management cited higher chiller pricing, a shift toward higher-margin maintenance revenue, and lower natural-gas costs and usage in Energy Production.
- Operating expenses decreased 21.0% to $3.09 million, including lower selling, general and administrative, and research and development expenses. Operating loss narrowed, but remained a loss.
- Reported net income included a $1.89 million gain from forgiveness of the prior PPP loan. A $37,497 unrealized investment gain and $6,046 realized gain also contributed. Thus, reported profit was not solely from operations.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said current resources, operating cash flows and the Second Draw PPP proceeds are expected to cover working-capital needs for the next 12 months; beyond that, the company needs sufficient cash generation and may require debt or equity financing.
- Management reported a $8.7 million backlog of product and installation projects at March 31, 2021: $4.2 million in purchase orders and $4.4 million in projects with completed customer approval and firm verbal commitment. Backlog is not necessarily indicative of future performance.
- The $1.87 million Second Draw PPP loan bears 1% interest, with repayment deferred until June 2022 if not forgiven. The company expects to seek forgiveness but stated there is no assurance of approval or amount. The loan restricts dividends and share repurchases while outstanding.
- COVID-19 effects remain uncertain and could continue to affect demand, project timing, service activity, energy sales, collections and cash flows. The company also identified risks involving incentives and tax benefits, regulation, competition and financing availability.
- Disclosure controls and procedures were deemed ineffective due to a material weakness involving general IT controls and reliance on a small number of individuals. Remediation through a new computer system was ongoing and delayed by accounting personnel changes.
- Contingencies include guarantees related to a former subsidiary, including approximately $42,846 of equipment-financing principal outstanding under a payment guarantee. Management did not consider payment under the guarantees probable and recorded an estimated $7,000 liability for the non-contingent portion. The company also has contractual cash-flow and other obligations related to previously sold energy-producing assets.
- Operating lease commitments totaled $2.65 million before imputed interest at quarter-end. Management reported no material pending legal proceedings and no material subsequent events.
Important facts for investors to verify
- Whether the Second Draw PPP loan is ultimately forgiven, and any resulting repayment or covenant implications.
- Whether revenue, particularly cogeneration sales, installation activity and Energy Production, recovers as COVID-19 disruptions ease; assess backlog conversion and customer collections.
- Whether improved gross margins persist despite lower revenue and changing product and service mix.
- Whether operating cash generation can support the business after PPP proceeds and meet obligations beyond the stated 12-month liquidity outlook.
- Progress and effectiveness of remediation of the disclosed material weakness in IT general controls.
- Potential exposure under energy-asset guarantees and customer-contract obligations, including any shortfalls or early terminations.