TECOGEN INC. — Q3 2018 Form 10-Q
Business and period: Tecogen designs and sells natural-gas-fueled cogeneration systems, provides related installation and maintenance, and sells energy under long-term customer contracts. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. The 2017 comparison includes American DG Energy only after its May 2017 acquisition.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $7.94 million | $8.50 million | $26.57 million | $22.94 million |
| Gross profit | $2.88 million | $3.26 million | $9.88 million | $9.16 million |
| Operating income (loss) | $(0.56) million | $0.09 million | $(1.13) million | $(0.08) million |
| Net income (loss) attributable to Tecogen | $(0.60) million | $0.03 million | $(1.34) million | $(0.22) million |
| Net loss per share | $(0.02) | $0.00 | $(0.05) | $(0.01) |
- Q3 revenue fell 6.6% year over year, primarily as service revenue declined $0.81 million; product revenue increased 14.0%, while energy-production revenue declined 6.2%.
- Nine-month revenue rose 15.8%. Product and service revenue increased, and energy-production revenue more than doubled, though the 2017 comparison includes only part of the year after the ADGE acquisition.
- Management reported Products and Services gross margin of 35.0% in Q3 versus 34.9%; for nine months it was 36.5% versus 38.3%, reflecting more lower-margin installation revenue. Energy Production gross margin was 42.3% in Q3 and 40.5% for nine months; management described 2017 margins as unusually high.
- Operating expenses rose to $3.45 million in Q3 and $11.01 million for nine months. Management cited higher administrative, sales and R&D costs; R&D included work toward potential commercialization of Ultera emissions technology.
Cash, liquidity and debt
- Cash was $136,717 at September 30, down from $1.67 million at year-end 2017. Working capital was $11.58 million, versus $12.95 million.
- Operating activities used $2.36 million of cash during the first nine months, compared with $2.00 million in 2017. Management cited slower collections and purchases made ahead of production; accounts receivable reached $11.55 million and inventory $5.98 million.
- Investing activities used $0.10 million and financing activities provided $0.92 million. Financing included revolving-credit borrowings and repayments and repayment of the $850,000 related-party loan, plus accrued interest.
- A secured revolving credit facility entered into in May 2018 provides up to $10 million and matures in May 2021. At September 30, gross borrowings were $1.83 million; after $124,870 of unamortized issuance costs, the balance-sheet amount was $1.71 million. The facility has financial and other covenants, and the bank agreed to waive noncompliance with certain covenants.
Outlook, risks and notable items
- No formal earnings or revenue guidance is provided. Management reported $15.7 million of product and installation backlog at September 30, including $7.5 million in purchase orders and $8.2 million in projects with firm verbal commitments; the filing cautions backlog may not indicate future performance.
- Remaining performance obligations were approximately $12.2 million, with about 95% expected to be recognized over the next 24 months. The measure excludes certain maintenance and all energy-production contracts.
- Management described installation revenue as variable with project timing and noted seasonal patterns in heating, cooling and service demand.
- A pending class action related to the ADGE merger retains state-law claims; federal securities claims were dismissed. A motion for judgment on the pleadings and a class-certification motion were pending. The company disputes the claims; damages and the likelihood of an unfavorable outcome were not reasonably estimable.
- Management concluded disclosure controls were not effective because of a material weakness involving IT general controls and a small number of individuals. A new computer system was being implemented, with partial implementation expected by year-end 2018.
- Effective in 2018, unrealized gains and losses on equity securities are recorded in earnings rather than other comprehensive income. The filing reports a nine-month unrealized investment loss of $59,042. The company also early adopted guidance to capitalize certain cloud-computing implementation costs and capitalized $40,690 for its ERP project during Q3.
Investor verification priorities
- Review the credit agreement’s covenant waiver, ongoing compliance, borrowing availability and liquidity needs given the low cash balance and operating cash use.
- Monitor receivable aging, collections, inventory levels and the conversion of backlog and remaining performance obligations into revenue and cash.
- Track segment margins, installation mix, energy-production costs and whether operating expenses moderate.
- Follow the ADGE-related litigation, including the pending pleadings and class-certification motions, and reassess potential exposure as the case develops.
- Confirm remediation of the disclosed IT control weakness and the progress and cost of the ERP implementation.