TECOGEN INC. — Q2 2021 Form 10-Q
Business and period: Tecogen designs, manufactures and sells commercial and industrial cogeneration and chiller systems, provides installation and maintenance services, and sells energy under long-term customer contracts. This unaudited report covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $6.15 million, down 17.3% from $7.44 million | $12.20 million, down 20.8% from $15.40 million |
| Gross profit and margin | $2.84 million; 46.3%, versus $2.91 million and 39.1% | $5.79 million; 47.5%, versus $5.70 million and 37.0% |
| Operating income (loss) | Loss of $0.31 million, versus loss of $0.50 million | Loss of $0.45 million, versus loss of $1.62 million |
| Net income (loss) attributable to Tecogen | Income of $0.40 million, or $0.02 per share, versus loss of $0.65 million, or $0.03 per share | Income of $2.17 million, or $0.09 per share, versus loss of $1.86 million, or $0.07 per share |
Revenue mix and margins: For the first half, Products and Services revenue declined 22.2% to $11.18 million; Energy Production revenue was nearly flat at $1.02 million. Lower cogeneration sales and installation activity drove the decline, partly offset by higher chiller and maintenance-service revenue. Management attributed improved gross margins to higher product margins, lower warranty costs, and a mix shift toward maintenance services. Q2 Energy Production revenue rose 34.2% year over year as some sites resumed operations.
Cash flow, liquidity and debt: First-half operating cash flow was negative $0.10 million, compared with positive $2.76 million in 2020; investing cash use was $0.08 million. Financing provided $1.87 million, reflecting proceeds from a second-draw PPP loan. Cash increased to $3.19 million at June 30 from $1.49 million at year-end 2020; working capital was $16.75 million. The balance sheet reported $1.87 million of long-term note payable, consisting of the second-draw PPP loan; the first PPP loan was forgiven. The company reported no current note payable and no material off-balance-sheet arrangements.
Material changes and unusual items
- First-half net income included a $1.89 million gain from forgiveness of the original PPP loan and a $0.71 million Employee Retention Credit (ERC). These items materially contributed to the reported profit; the company remained loss-making at the operating level.
- The second-draw PPP loan was $1.87 million at 1% interest, with repayment deferred until June 2022. Tecogen intended to apply for forgiveness before the end of September 2021, but stated that approval and the amount forgiven were uncertain.
- Backlog of product and installation projects, excluding service contracts, was $8.8 million at June 30: $5.0 million in purchase orders and $3.8 million in projects with completed internal approval and a firm verbal commitment. The company cautioned that backlog is not necessarily indicative of future performance.
Outlook, commentary and risks
Management said that, based on its current operating plan, available resources—including cash, operating cash flows, the second-draw PPP loan and anticipated ERC—should cover working-capital requirements for the next 12 months. It expects to need sufficient operating cash generation beyond that period and may need debt or equity financing if cash from operations is inadequate. No specific revenue or earnings guidance was provided.
COVID-19 continued to delay customer orders and installation projects, disrupt service at temporarily closed facilities, affect energy production, and slow some customer payments. Management noted recovery in Q2 as restrictions eased, but future effects remained uncertain. Other risks include variable timing of large, low-volume product shipments and the uncertain forgiveness of the second PPP loan. Tecogen also disclosed a material weakness in information-technology general controls; remediation through a new computer system was ongoing and delayed following accounting personnel changes. The company reported no material pending legal proceedings. It has contractual guarantees related to certain sold energy-production assets and EuroSite Power obligations; management did not consider any guarantee payment probable at June 30.
Important facts for investors to verify
- Whether the second-draw PPP loan was ultimately forgiven, and the amount and timing of any forgiveness.
- Whether operating cash flow improves, given first-half cash use despite reported net income and dependence of liquidity on PPP proceeds and ERC.
- Whether product and installation revenue recover from COVID-related delays and whether the $8.8 million backlog converts to orders and recognized revenue.
- Progress in remediating the disclosed IT general-controls material weakness.
- Potential exposure under energy-asset and other contractual guarantees, and developments in customer-site operations and collections.