TECOGEN INC. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; financial statements are unaudited. Tecogen designs, manufactures and sells natural-gas-fueled combined heat and power systems, and also sells energy from customer-site systems under long-term contracts. The filing reports Products and Services and Energy Production segments.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $8.45 million | $7.59 million | $18.63 million | $14.44 million |
| Gross profit | $3.16 million | $2.99 million | $7.00 million | $5.90 million |
| Gross margin | 37.4% | 39.3% | 37.6% | 40.9% |
| Operating loss | $636,286 | $245,857 | $565,381 | $168,157 |
| Net loss attributable to Tecogen | $754,350 | $293,540 | $733,592 | $248,755 |
| Basic and diluted loss per share | $0.03 | $0.01 | $0.03 | $0.01 |
Revenue and margins: Q2 revenue rose 11.4%; first-half revenue rose 29.0%. Growth included higher service and installation revenue and Energy Production revenue. The prior-year comparison includes only a partial period of American DG Energy (ADGE), acquired in May 2017. Product and Services gross margin was 35.9% in Q2 and 37.1% for the first half, versus 37.3% and 39.9%, respectively, in 2017; management attributed the decline primarily to mix, including more lower-margin installation work. Energy Production gross margin was 44.3% in Q2 and 39.7% for the first half.
Cash flow and liquidity: Operating activities used $2.54 million in the first half, versus $891,955 in the prior-year period, with increased receivables, inventory and unbilled revenue among the cash uses. Cash declined $657,637 to $1.02 million. Working capital was $12.12 million, compared with $12.95 million at year-end 2017. Investing activities provided $112,475, including $442,786 of cash acquired with TTcogen assets. Financing activities provided $1.77 million.
Debt and balance sheet: At June 30, 2018, total assets were $51.47 million and total liabilities were $18.37 million. The balance sheet included $2.56 million outstanding on a secured revolving credit facility, against a facility limit of up to $10 million; borrowing availability depends on eligible receivables and inventory. The May 2021 facility bears interest at LIBOR plus 3.00% or the lender’s base rate plus 1.5%, subject to financial and other covenants. Tecogen repaid its $850,000 related-party loan in May 2018.
Material changes and notable items
- Q2 product revenue fell 20.3% year over year, while service revenue increased 20.6%; first-half product revenue rose 3.9% and service revenue rose 18.6%.
- Energy Production revenue was $3.29 million in the first half of 2018, compared with $774,192 in the 2017 period, which reflected revenue only after ADGE’s acquisition.
- Operating expenses increased, including research and development spending related to cost-sharing under a grant for potential commercialization of Ultera emissions technology. Q2 operating loss included $96,800 of non-recurring merger-related litigation expense.
- Effective January 1, 2018, the company began recognizing unrealized equity-security gains and losses in net income rather than other comprehensive income or loss. The first-half 2018 results include a $78,723 unrealized investment loss; the accounting change also reclassified $165,317 of prior accumulated unrealized losses to accumulated deficit.
- At June 30, the company reported $14.2 million of product and installation backlog, excluding service contracts: $10.6 million in purchase orders and $3.6 million in projects with completed customer approvals and firm verbal commitments. Remaining performance obligations were approximately $12.7 million; the company expected to recognize about 96% over the next 24 months. Backlog is not necessarily indicative of future performance.
Outlook, risks and contingencies
The filing provides no formal revenue or earnings guidance. Management notes seasonal demand patterns: chiller service is generally busier from May through September, while heating-system sales are concentrated ahead of winter. As of June 30, the company had 81 operational energy systems. Management attributed weaker cash and working capital to longer collection periods and pre-buying for production.
- Disclosure controls and procedures were deemed ineffective due to a material weakness involving information technology general controls and reliance on a small number of individuals. Management was implementing a new computer system and expected partial implementation by year-end 2018.
- A federal class action related to the ADGE merger retains state-law fiduciary-duty claims after dismissal of the federal securities claims. Mediation did not settle the matter; a motion for judgment on the pleadings and class-certification proceedings were pending. The company disputes the claims; damages and likelihood of an unfavorable outcome were not reasonably estimable.
- Tecogen guarantees certain former-subsidiary EuroSite Power obligations, including equipment financing with approximately $245,725 of principal remaining. Management did not consider payment probable; a $10,000 liability was recorded for the non-contingent portion.
- The revolving credit agreement requires a fixed-charge coverage ratio of at least 1.10:1.00, restricts certain activities and limits financed capital expenditures to $500,000 in aggregate per fiscal year. The filing does not state covenant headroom.
Investor verification points
- Track receivables, collections, unbilled revenue and operating cash burn, given the first-half cash use and reduced cash balance.
- Assess whether backlog and remaining performance obligations convert to revenue on schedule, and whether installation mix continues to pressure margins.
- Verify borrowing availability, interest costs and compliance with the credit facility’s financial covenants.
- Monitor the merger-related litigation, potential exposure under the EuroSite guarantees, and remediation of the disclosed IT-controls material weakness.
- Consider the effect of equity-security valuation changes and the 2018 accounting presentation when comparing results with prior periods.