TECOGEN INC. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is Q1 2018. Tecogen designs and sells commercial and industrial natural-gas cogeneration equipment and services, and operates customer-site energy systems under long-term contracts.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $8.18 million | $10.18 million |
| Gross profit / margin | $2.96 million / 36.2% | $3.84 million / 37.7% |
| Operating income (loss) | $(3.35) million | $0.07 million |
| Net income (loss) attributable to Tecogen | $(3.28) million; $(0.13) per diluted share | $0.02 million; $0.00 per diluted share |
| Cash used in operating activities | $(0.61) million | $(0.71) million |
| Cash and cash equivalents at period end | $2.61 million | $1.20 million |
Q1 2019 revenue comprised $3.02 million of products, $3.91 million of services, and $1.24 million of energy production. The filing reports a $1.08 million gain on asset sales and a $3.69 million goodwill impairment charge. Other expense, net, was $66,855. The impairment was noncash and drove the reported operating and net losses.
Liquidity, debt and balance sheet
- Working capital was $16.20 million at March 31, 2019, versus $13.17 million at December 31, 2018. Management attributes the increase in cash and working capital primarily to energy-asset sale proceeds.
- The company had no balance outstanding on its secured revolving credit line at quarter-end. The facility provides up to $10 million, subject to eligible collateral and borrowing-base availability, and matures in May 2021. The company reported compliance with its covenants.
- Total liabilities were $15.72 million and stockholders’ equity was $24.68 million at March 31. Adoption of the lease standard resulted in $2.55 million of right-of-use assets and corresponding lease obligations, including $0.56 million current and $1.99 million long-term.
- Operating cash use was partly offset by a $5.00 million cash inflow from asset sales; investing activities provided $4.96 million, while financing activities used $2.01 million, primarily for repayment of the credit line.
Changes versus prior year and operating context
- Revenue declined 19.6%. Products and services revenue fell 17.7%, including lower chiller sales and installation activity; energy-production revenue declined 30.4%, reflecting the sale of energy-producing assets.
- Gross margin decreased 1.5 percentage points. Management cited lower-margin installation projects as a factor in the products and services segment’s margin decline; energy-production margin was nearly unchanged.
- General and administrative expense declined 4.8%; research and development expense increased 14.2%, reflecting continued Tecofrost, industrial refrigeration, and potential non-stationary Ultera emissions-technology work.
- During the quarter, the company sold energy-producing assets associated with eight power purchase agreements for total consideration of $7 million. The cash flow statement reports $5 million of sale proceeds received during the quarter.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management notes that results are not necessarily indicative of full-year results, installation activity can vary, and chiller-related service demand is typically seasonal, with a busier period from May through September.
- At March 31, product and installation backlog was $26.2 million, including $17.9 million of purchase orders and $8.4 million of projects with firm verbal commitments undergoing order execution. The filing cautions that backlog is not necessarily indicative of future performance.
- Remaining performance obligations were approximately $20.4 million, subject to stated exclusions. The company expects to recognize approximately 16% over the next 24 months, with 77% in the first 12 months and 7% in the following 12 months; the remainder thereafter.
- Asset-sale agreements require Tecogen to operate and maintain sold systems and include minimum cash-flow guarantees, potential make-whole obligations for customer-contract defaults or early termination, and certain decommissioning-cost obligations. The company recorded a $350,000 liability reserve related to sale guarantees.
- The company also guarantees certain former-subsidiary obligations, including approximately $190,000 of equipment-financing principal; management did not believe any payment under these guarantees was probable at filing.
- Management concluded disclosure controls were not effective because of a material weakness involving a small number of individuals responsible for IT general controls. A new computer system was being implemented as part of remediation, subject to available resources.
- The company states that the merger-related litigation was dismissed and that it had no other material legal proceedings. It identifies no material subsequent events.
Important facts for investors to verify
- Whether operating performance and cash generation improve after the sharp revenue decline and significant quarterly loss.
- Actual borrowing-base availability under the $10 million revolving facility and compliance with its fixed-charge coverage and other covenants.
- The financial exposure and adequacy of reserves for guarantees tied to the sold energy assets, including minimum cash flows, termination and decommissioning obligations.
- Progress and effectiveness of remediation of the disclosed IT general-controls material weakness.
- Conversion of stated backlog and remaining performance obligations into orders, revenue, and collections, noting management’s caution about backlog predictability.