TECOGEN INC. — Q2 2019 Form 10-Q
Business context and reporting period
Tecogen designs, manufactures and services natural-gas-fueled cogeneration systems, and sells energy produced by company-owned customer-site systems. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the same 2018 periods.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $7.87 million | $8.45 million | $16.04 million | $18.63 million |
| Gross profit / margin | $3.43 million / 43.5% | $3.16 million / 37.4% | $6.38 million / 39.8% | $7.00 million / 37.6% |
| Operating loss | $0.33 million | $0.64 million | $3.68 million | $0.57 million |
| Net loss attributable to Tecogen | $0.36 million; $0.01/share | $0.75 million; $0.03/share | $3.64 million; $0.15/share | $0.73 million; $0.03/share |
For the first half, operating cash used was $2.08 million, versus $2.54 million in 2018. Investing activities provided $4.90 million, primarily from asset-sale proceeds; financing activities used $2.00 million, mainly for net line-of-credit repayments. Cash rose to $1.09 million from $0.27 million at year-end 2018. Working capital was $15.53 million.
At June 30, total assets were $39.76 million and total liabilities $15.40 million. The company had no revolving-credit borrowings outstanding under its facility of up to $10 million, subject to borrowing-base availability and covenants. It reported $2.42 million of lease obligations, including $0.52 million current and $1.90 million long-term. Management said it believed the company was in compliance with credit covenants.
Material changes versus prior periods
- Q2 revenue fell 6.9%; first-half revenue fell 13.9%. The reduction largely reflects lower energy-production revenue after sales of energy-producing assets. Q2 energy-production revenue declined 61.7% year over year; first-half revenue declined from $3.29 million to $1.82 million.
- Products and services revenue was $7.29 million in Q2, up from $6.94 million, with higher service revenue offsetting slightly lower product sales. First-half products and services revenue declined to $14.22 million from $15.34 million.
- Gross margin improved in Q2, which management attributed to higher gross profit in products and services. First-half products-and-services margin rose to 40.3% from 37.1%, primarily due to installation margin; energy-production margin decreased to 36.0% from 39.7%.
- First-half operating results included a $3.69 million goodwill impairment and a $1.08 million gain on asset sales. The impairment followed the sale of energy assets and reduced remaining energy-production goodwill to estimated fair value. Excluding the impairment, the reported year-over-year operating-loss increase would not have occurred.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management cautions that first-half results are not necessarily indicative of full-year results.
- As of June 30, product and installation backlog, excluding service contracts, was $25.3 million: $19.0 million in purchase orders and $6.3 million in firm verbal commitments subject to execution. The filing cautions backlog is not necessarily indicative of future performance. Remaining performance obligations were approximately $20.4 million, with about 93% expected to be recognized over the next 24 months.
- The asset sales involved eight power purchase agreements for stated total consideration of $7 million. The company retained long-term operating and maintenance work and provided the purchaser minimum-cash-flow and early-termination protections, as well as certain decommissioning commitments. A $350,000 reserve was recorded for future costs. The filing does not quantify the maximum potential exposure under these sale-related guarantees.
- Tecogen guaranteed certain former-subsidiary obligations, including equipment-financing principal of approximately $168,000 outstanding at June 30, 2019, due through September 2021. Management did not believe any guarantee payments were probable and recorded approximately $7,000 for the non-contingent portion.
- Management concluded disclosure controls were not effective because of a material weakness involving general IT controls and a small number of individuals. The company was implementing a new computer system and pursuing remediation as resources become available.
- The company adopted the lease accounting standard in January 2019, recognizing right-of-use assets and lease liabilities; it reported no impact on its statements of operations or cash flows. The filing states that the merger-related litigation had been dismissed and that no material subsequent events occurred through filing.
Important facts for investors to verify
- How the retained sale-related guarantees, minimum-cash-flow provisions and decommissioning commitments may affect future cash flows.
- Whether the $25.3 million backlog converts to orders and revenue, and how its composition compares with the $20.4 million of remaining performance obligations.
- Whether service-contract growth and improved products-and-services margins can offset reduced energy-production revenue and lower total revenue.
- Cash burn, working-capital movements, borrowing-base availability and ongoing compliance with the credit facility’s financial covenants.
- Progress and effectiveness of remediation for the disclosed material weakness in IT general controls.