TECOGEN INC. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Tecogen designs and sells commercial and industrial cogeneration systems and provides installation, maintenance, and on-site energy production under long-term customer contracts.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $7.96 million | $8.18 million |
| Gross profit / margin | $2.79 million / 35.1% | $2.96 million / 36.2% |
| Operating loss | $1.12 million | $3.35 million |
| Net loss attributable to Tecogen | $1.20 million; $0.05 per share | $3.28 million; $0.13 per share |
| Operating cash flow | $1.12 million provided | $0.61 million used |
| Cash | $0.92 million | $0.88 million at Dec. 31, 2019 |
| Working capital | $13.92 million | $14.46 million at Dec. 31, 2019 |
| Revolver balance | $1.49 million gross; $1.46 million net of unamortized issuance costs | $2.40 million net at Dec. 31, 2019 |
Total assets were $38.46 million and total liabilities were $16.27 million at quarter-end. The company reported $12.5 million of product and installation backlog, excluding service contracts: $9.8 million in purchase orders and $2.7 million in projects with firm verbal commitments, but not yet orders. No full-year earnings or revenue guidance was provided.
Changes and notable items
- Revenue fell 2.6% year over year. Product revenue decreased 9.1%, including a roughly $655,000 return of new chiller products, which were included in inventory at quarter-end. Service revenue increased 14.1%, driven by installation activity and maintenance contracts.
- Energy production revenue declined to $751,000 from $1.24 million, reflecting the prior sale of energy-producing assets. Products and Services gross margin declined to 35.0% from 36.3%; Energy Production gross margin was 35.5% in both periods.
- The net loss narrowed substantially, but comparison is affected by 2019 unusual items: a $3.69 million goodwill impairment and a $1.08 million gain on asset sales. The 2020 loss also included a $180,000 charge for abandoned patent applications.
- Operating cash flow was positive, aided by collections and lower receivables and unbilled revenue; inventory growth used cash. Investing activities used $120,000, and financing activities used $954,000, primarily to repay the revolver.
Outlook, risks, and contingencies
- COVID-19: Management said manufacturing and service operations continued under essential-service designations, while sales, engineering, and some administrative work shifted remotely. The Waltham facility closed for about a week in April for disinfection and then reopened. Management warned that customer collections, project execution, product sales, demand, and supply chains could be affected; the impact was uncertain.
- Liquidity and financing: The company stated that, without PPP funding, it might lack immediate capital to sustain operations without furloughs and significant disruption. It cited a large customer sale return, possible weaker sales and collections, and difficulty meeting its fixed-charge covenant. A $25 million shelf registration became effective April 23, 2020, allowing potential securities offerings; no offering was reported in this filing.
- Debt and covenants: Tecogen was not in compliance with all covenants under its secured revolver at March 31. The facility matured in May 2021; the company subsequently terminated it on May 11, 2020 and paid a $25,000 early termination fee.
- PPP loan: On April 17, 2020, Tecogen received an unsecured $1.874 million loan at 1% interest, guaranteed by the SBA. Repayment was deferred until November 17, 2020, with 18 monthly installments if not forgiven. The company intended to use proceeds for payroll, rent, and utilities and apply for forgiveness; forgiveness was not assured.
- Other exposures: The company disclosed customer payment disputes and anticipated legal action; an amount due under one equipment purchase agreement could be material. It also guaranteed certain former-subsidiary obligations, including about $135,000 of equipment-financing principal, though management did not consider payments probable. Asset-sale agreements include minimum cash-flow guarantees and other potential obligations.
- Controls: Management concluded disclosure controls were ineffective because of a material weakness involving IT general controls and a small number of individuals. A new computer system was being implemented as a remediation measure.
Most important facts for investors to verify
- Whether the PPP loan qualified for, and ultimately received, forgiveness, and the company’s liquidity after terminating the revolver.
- How COVID-19 affected collections, customer demand, backlog conversion, and operating costs after the quarter.
- The status and potential financial impact of the customer payment disputes and the equipment return.
- Whether the covenant breach was resolved before revolver termination and whether any related lender obligations remained.
- Progress in remediating the IT control weakness, and the realization and timing of the reported backlog.