TECOGEN INC. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Tecogen designs, manufactures and services natural-gas cogeneration, chiller and heat-pump systems, and sells energy under long-term contracts. Financial statements are unaudited.
Financial performance and position
- Q2 revenue: $6.75 million, up 5.2% year over year. Services revenue rose 29.6% to $3.95 million; Products revenue fell 18.8% to $2.45 million; Energy Production revenue declined 1.2% to $350,000.
- Q2 profitability: Gross profit was $2.83 million and gross margin was 42.0%, versus 42.1% a year earlier. Operating loss was $780,000, compared with $817,000; net loss attributable to Tecogen was $780,000, or $0.03 per share, versus $856,000, or $0.03 per share.
- First-half revenue and earnings: Revenue was $12.13 million, down 12.4%. Products revenue fell 40.2% to $4.16 million, while Services grew 18.8% to $7.09 million. Gross margin declined to 40.6% from 41.8%. Operating loss widened to $2.23 million from $736,000; net loss attributable to Tecogen was $2.27 million, or $0.09 per share, versus $767,000, or $0.03 per share.
- Cash flow: First-half operating cash flow was positive $154,000, compared with a $579,000 use of cash in 2022. Investing used $197,000; financing cash flow was zero. Cash decreased $43,000 to $1.87 million. Operating cash flow benefited from collections of accounts receivable and employee retention credits, increased payables and deferred revenue; inventory growth used cash.
- Liquidity and obligations: Working capital was $11.55 million, down from $14.34 million at year-end 2022; current assets were $21.77 million and current liabilities $10.23 million. Total liabilities were $12.98 million. The balance sheet lists $973,000 of lease obligations and $2.29 million of acquisition liabilities; no separate conventional borrowing balance is shown.
- Other metrics: Inventories increased to $12.03 million from $10.48 million. Backlog, excluding service contracts, was $8.23 million, including $5.72 million in purchase orders and $2.51 million in firm verbal commitments subject to execution.
Material changes and notable items
- The April 1 Aegis acquisition added maintenance agreements covering approximately 200 cogeneration systems, eight employees, vehicles and inventory. Tecogen reported $628,813 of acquired-contract revenue and $411,106 of gross profit since acquisition. Consideration included $170,000 cash, a $300,000 receivables credit, and contingent consideration; the acquisition added $723,000 of goodwill.
- First-half Products sales weakness drove the revenue decline; management attributed it partly to long sales cycles and reduced business-development activity following COVID-19. Services growth reflected the Aegis contracts and higher revenue from existing contracts.
- Service gross margin fell to 46.2% from 52.4% in the first half, primarily due to higher labor and material costs, including costs associated with Aegis contracts. First-half operating expenses rose 9.6%, with higher salaries, travel, insurance, research and development, and acquisition-related costs.
- First-half results also compare against a $71,375 gain from termination of an unfavorable contract liability in 2022. A $37,497 unrealized gain on investment securities was recorded in each six-month period.
Outlook, risks and contingencies
- Liquidity outlook: Management believes current resources, including cash and operating cash flows, are sufficient for working capital needs over the next 12 months. It cautions that additional cash may be needed beyond that period and that debt or equity financing may not be available on acceptable terms.
- Business outlook: Tecogen expected to begin accepting orders for its Tecochill Hybrid-Drive Air-Cooled Chiller in Q4 2023. It is pursuing Controlled Environment Agriculture opportunities with other companies; no formal financial guidance is provided.
- Operating and market risks: Product sales are high-dollar and low-volume and can fluctuate substantially. Energy Production revenue and economics can be affected by site downtime, seasonality, and natural-gas and electricity prices. Management also cites inflation, supply-chain and cybersecurity risks.
- Cybersecurity and controls: A ransomware attack on April 28, 2023 disrupted access to two workstations; the network was restored to full operation by May 1. The company implemented password changes, an account audit and multifactor authentication. Management concluded disclosure controls were ineffective because of a material weakness in IT general controls and said it was taking remediation steps as resources became available.
- Legal contingency: Plaintiffs in Ontario seek CDN $1 million plus interest and legal fees over an alleged 2022 cogenerator fire. Tecogen denies liability and had reserved $150,000 for anticipated damages potentially not covered by insurance. Management reported no material expected payment under a separate energy-contract cash-flow guarantee.
- Facilities: The Waltham headquarters lease expires March 31, 2024. New Billerica leases begin January 1, 2024; estimated initial improvements are $1.0 million to $1.25 million.
Investor verification priorities
- Track Products orders, backlog conversion and whether the anticipated Q4 2023 chiller orders materialize.
- Assess whether Aegis service-contract growth can be sustained while managing labor, material, repair-reserve and contingent-payment costs.
- Monitor operating cash flow, inventory and working-capital trends, and the remaining employee retention credit receivable; management expected the remaining balance in 2023.
- Review remediation of the IT general-controls material weakness and any further cybersecurity incidents.
- Follow developments in the Ontario lawsuit, the $150,000 reserve, and the upcoming Billerica facility costs and transition.