TECOGEN INC. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Tecogen designs and sells commercial and industrial cogeneration systems and, following its May 2017 acquisition of American DG Energy (ADGE), also sells energy under long-term customer contracts. Q1 2018 includes ADGE energy-production results; Q1 2017 does not, limiting comparability.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $10.18 million | $6.85 million |
| Gross profit | $3.84 million | $2.91 million |
| Gross margin | 37.7% | 42.6% |
| Operating income | $70,906 | $77,702 |
| Net income attributable to Tecogen | $20,759 | $44,787 |
| Operating cash flow | $(712,302) | $(1,552,909) |
- Revenue increased 48.6%. Product revenue rose 30.9%, mainly from higher chiller sales, partly offset by lower cogeneration sales. Service revenue rose 16.8%, largely from installation activity. Energy-production revenue was $1.78 million, with no comparable Q1 2017 revenue.
- Management reported a 38.1% gross margin for Products and Services, down from 42.6%, citing product mix. Energy Production gross margin was 35.7%. Consolidated gross margin fell to 37.7% from 42.6%.
- Operating expenses increased to $3.77 million from $2.84 million, including higher general and administrative, selling, and research and development costs. The quarter included $9,610 of one-time merger-related expense.
- Cash and cash equivalents were $1.20 million, down from $1.67 million at year-end. Working capital was $12.74 million, versus $12.95 million. Current assets were $23.70 million and current liabilities $10.97 million.
- Operating cash use improved year over year but remained negative. Higher receivables and unbilled revenue used cash; management attributed lower cash and working capital partly to longer collection periods and pre-buying for production. Investing activities provided $193,319, including $442,786 cash acquired with TTcogen; financing activities provided $48,245 from option exercises.
- At March 31, liabilities totaled $18.73 million, including an $850,000 related-party loan bearing 6% interest. On May 4, 2018, Tecogen repaid it, including accrued interest, for $919,590 using proceeds from a new credit facility.
Changes, outlook, and other significant items
- The ADGE acquisition expanded the business to include contracted energy production. Tecogen reported 81 operational energy systems at quarter-end, with approximately 5,035 kW of electricity capacity, 39.0 million Btu of heat and hot water, and 4,660 tons of cooling.
- Product and installation backlog, excluding service contracts, was $14.6 million: $11.6 million in purchase orders and $3.0 million in firm verbal commitments progressing through customer execution. The filing cautions that backlog is not necessarily indicative of future performance.
- As of March 31, remaining performance obligations under the specified ASC 606 definition were approximately $1.8 million; the company expected to recognize about 99% over the next 24 months. Adoption of the new revenue standard did not materially change reported revenue or its recognition pattern.
- On March 27, Tecogen agreed to acquire Tedom USA’s 50% interest in TTcogen for $72,598, ending the joint venture arrangement. The agreement provides certain northeastern U.S. marketing and distribution rights for Tedom’s Micro T35 equipment and limits sales of certain competing products.
- On May 4, the company entered a secured revolving credit agreement with capacity of up to $10 million, subject to eligible receivables, raw materials, and finished goods. Interest is, at the borrower’s option, one-month LIBOR plus 3.00% or the lender’s base rate plus 1.5%; amounts are payable May 4, 2021. The filing gives no specific borrowing availability or financial guidance.
- New accounting rules required unrealized equity-security gains and losses to be recorded in net income. Tecogen recorded a $19,681 Q1 unrealized loss on its EuroSite Power investment; adoption also reclassified $165,317 of prior unrealized losses from accumulated other comprehensive loss to accumulated deficit.
- A shareholder lawsuit related to the ADGE merger continues on state-law fiduciary-duty claims after federal securities claims were dismissed. The damages sought are unspecified and the company said the likelihood of an unfavorable outcome was not reasonably estimable; it intends to defend the case.
- Management concluded disclosure controls were not effective because of a material weakness involving general IT controls and a small number of individuals. A new computer system was being implemented, with partial implementation expected by year-end 2018, subject to available resources. The company also cited seasonal demand patterns and warned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Cash conversion and collections: receivables were $11.79 million and unbilled revenue $4.75 million at March 31; monitor aging, subsequent collections, and operating cash flow.
- Availability, borrowing, collateral requirements, and covenants under the new $10 million revolving facility, as well as the cost of replacing the related-party loan.
- Whether margins recover from the product-mix-related decline and whether backlog converts into orders, revenue, and cash on schedule.
- Progress in remediating the disclosed material weakness in IT general controls and developments in the remaining merger-related litigation.