TECOGEN INC. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Tecogen designs, manufactures, sells and services cogeneration and related energy systems. Results are compared with the corresponding 2019 periods.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $7.44 million | $7.87 million | $15.40 million | $16.04 million |
| Gross profit / margin | $2.91 million / 39.1% | $3.43 million / 43.5% | $5.70 million / 37.0% | $6.38 million / 39.8% |
| Operating loss | $0.50 million | $0.33 million | $1.62 million | $3.68 million |
| Net loss attributable to Tecogen | $0.65 million | $0.36 million | $1.86 million | $3.64 million |
| Loss per share, basic and diluted | $0.03 | $0.01 | $0.07 | $0.15 |
| Operating cash flow | Not presented separately | Not presented separately | $2.66 million provided | $2.10 million used |
Q2 revenue fell 5.5%. Product revenue rose 36.7%, but services declined 21.2% and energy-production revenue fell 52.2%. First-half revenue decreased 4.0%; product revenue was down 11.4%, services 5.5%, and energy production 43.5%. COVID-related project stoppages, customer-site closures and service disruptions affected revenue and margins.
At June 30, cash was $2.86 million, working capital $15.04 million, current assets $23.84 million and current liabilities $8.81 million. Total liabilities were $14.30 million. The revolving credit facility had been terminated and repaid; the balance sheet included $1.87 million of PPP loan debt ($0.21 million current and $1.67 million long-term). Lease obligations totaled approximately $1.91 million. Operating cash flow benefited substantially from lower accounts receivable and unbilled revenue; the filing attributes much of the receivables decline to four large product sales paid early or within terms.
Material changes and unusual items
- Q2 operating loss and net loss worsened year over year as gross profit declined and other expense increased. Other expense included a $78,723 unrealized investment loss and higher interest expense.
- First-half losses improved compared with 2019, principally because 2019 included a $3.69 million goodwill impairment and a $1.08 million gain on energy-asset sales. These items make the year-over-year loss comparison less indicative of underlying operating performance.
- In May 2020, Tecogen terminated its Webster revolving credit facility, paid a $25,000 early termination fee, and wrote off $37,861 of unamortized financing costs. It borrowed $1.87 million under the Paycheck Protection Program (PPP) in April at 1% interest.
- Tecogen voluntarily delisted from Nasdaq effective June 19, 2020; its shares trade on OTCQX under TGEN. The filing reported 24,850,261 common shares outstanding as of August 10, 2020.
- During the first half, the company recorded a $179,944 charge for abandoned patent applications and returned approximately $655,000 of new chiller products, which were included in inventory at quarter-end.
Outlook, risks and contingencies
Management said existing resources, including cash and operating cash flows, should meet working-capital needs for the next 12 months under its current operating plan, but noted that growth may require additional debt or equity financing. Backlog at June 30 was $13.3 million: $7.1 million in purchase orders and $6.2 million in projects with completed customer approvals and firm verbal commitments. Management cautioned that backlog is not necessarily indicative of future performance. Remaining performance obligations were approximately $7.8 million, with about 98% expected to be recognized over the following 12 months.
The pandemic caused customer closures, delayed or halted installation work, reduced energy output, slower customer payments and operating inefficiencies. Management stated that critical manufacturing and service operations continued under essential-service designations, but future COVID-19 effects remained uncertain. Tecogen intended to seek PPP forgiveness and reported using more than 80% of proceeds for payroll, rent and utilities; forgiveness was not assured. The company also described guarantees tied to energy assets previously sold, including minimum cash-flow and early-termination provisions, and guarantees of certain former-subsidiary obligations. It did not consider payments under the latter guarantees probable at the reporting date. The company reported customer collection litigation and efforts to enforce settlements or judgments.
Management concluded disclosure controls were not effective because of a material weakness involving general IT controls and a small number of individuals. Remediation, including implementation of a new computer system, was ongoing. The filing provides no specific financial guidance.
Important facts for investors to verify
- Whether the PPP loan was forgiven, and the amount, if any, that remained repayable.
- Whether COVID-related customer closures, project delays, collections and service margins improved after quarter-end.
- How much of the reported backlog converts into binding orders, revenue and cash, particularly the $6.2 million verbal-commitment portion.
- Whether operating cash generation can continue without the one-period benefit from receivables collections, and whether additional financing will be needed.
- Progress in remediating the IT-control material weakness, and the potential exposure under asset-sale guarantees and customer disputes.