TECOGEN INC. quarterly report, Q1 FY2022

TECOGEN INC. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022; comparable period is Q1 2021. Tecogen designs and sells commercial and industrial cogeneration and chiller systems, provides maintenance and installation services, and sells energy under long-term customer contracts. Shares trade on OTCQX as TGEN.

Financial performance

MetricQ1 2022Q1 2021
Revenue$7.44 million$6.06 million
Gross profit / margin$3.09 million / 41.6%$2.95 million / 48.7%
Operating income (loss)$81,000($139,000)
Net income attributable to Tecogen$89,000; $0.00 per share$1.77 million; $0.07 per share
Cash provided by operations$1.89 million$370,000
  • Revenue increased 22.8%, led by product sales, up 85.6% to $3.94 million. Services revenue fell 11.1% to $2.92 million, largely due to lower installation revenue; energy production revenue fell 11.0% to $582,000.
  • Gross margin declined 7.1 percentage points, principally because of higher material costs. Product gross margin fell to 32.9% from 44.7%; services margin was 53.1% in both periods, while energy production margin rose to 42.3% from 39.7%.
  • Q1 2021 net income included a $1.89 million gain from forgiveness of a PPP loan. The 94.9% year-over-year decline in Tecogen-attributable net income therefore does not reflect operating performance alone. Q1 2022 also included $33,945 in asset-disposition gain and $71,375 from termination of unfavorable contract liabilities.

Financial position and liquidity

  • At March 31, 2022, cash was $5.46 million, up $1.85 million from year-end 2021; working capital was $16.33 million. Current assets were $25.61 million and current liabilities $9.28 million.
  • Operating cash flow was $1.89 million, compared with $370,000 a year earlier. The filing attributes the increase mainly to collections and changes in receivables, unbilled revenue, and accounts payable.
  • Total liabilities were $11.46 million, including $1.80 million of operating lease obligations. The filing reports no outstanding PPP debt; both PPP loans had been forgiven. It does not report other borrowings outstanding at quarter-end.
  • An ERC receivable of $1.28 million was included in current assets. On April 14, 2022, the company received $564,027 for its Q3 2021 claim, plus $1,275 interest; payment for Q1 and Q2 2021 claims remained outstanding.

Outlook, risks, and other notable items

  • Management said existing resources, operating cash flows, and anticipated ERC proceeds should meet working-capital needs for the next 12 months. Beyond that period, the company needs sufficient operating cash generation and may need debt or equity financing.
  • Backlog at March 31 was $9.4 million: $6.4 million of purchase orders and $2.9 million of projects with firm verbal commitments undergoing order execution. Management cautioned that backlog is not necessarily indicative of future results.
  • Tecogen expected a hybrid air-cooled chiller prototype by Q4 2022 and incremental revenue in 2023; these are expectations, not guarantees. A provisional patent had been filed.
  • Management cited COVID-related order delays, facility closures and lower energy-production revenue; inflation in material costs; seasonality in chiller demand; and supply-chain, commodity-price, and cybersecurity uncertainties related to the war in Ukraine. Higher natural-gas prices could affect energy-production economics, while higher electricity prices could improve customer savings from Tecogen products.
  • Management reported disclosure controls and procedures were not effective due to a material weakness involving general IT controls and a small number of individuals. Remediation was planned as resources became available. No material pending legal proceedings were reported. The company said it did not expect material payments under its energy-production cash-flow guarantee; the reported obligation was $3,911.

Important facts for investors to verify

  • Whether product sales growth can be sustained and whether material-cost inflation continues to pressure gross margins.
  • Backlog conversion, especially the $2.9 million of verbal-commitment projects, and the timing of the chiller prototype and potential 2023 revenue.
  • Collection of the remaining ERC receivable and the assumptions supporting management’s 12-month liquidity outlook.
  • The nature, remediation progress, and potential reporting implications of the material weakness in IT general controls.
  • The cash-flow statement reports deferred revenue as a $504,229 operating cash outflow, while the MD&A text describes deferred revenue as increasing and providing cash. Investors should reconcile this inconsistency against the underlying filing and balances.