TECOGEN INC. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020. Financial statements are unaudited. Comparisons are with Q3 and the first nine months of 2019, as applicable.
Business context and reporting period
Tecogen designs, manufactures, sells and services combined heat and power systems and related products. Its two segments are Products and Services and Energy Production, which sells electricity, heat, hot water and cooling under long-term customer contracts. The company reported that COVID-19 disrupted customer operations, installation work and energy production. Tecogen’s shares moved from Nasdaq to OTCQX in June 2020.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $7.20 million | $8.67 million | $22.60 million | $24.71 million |
| Gross profit | $2.79 million | $2.83 million | $8.48 million | $9.22 million |
| Gross margin | 38.7% | 32.7% | 37.5% | 37.3% |
| Operating loss | $207,155 | $538,183 | $1.82 million | $4.22 million |
| Net loss attributable to Tecogen | $231,920 | $586,249 | $2.09 million | $4.22 million |
| Loss per share, basic and diluted | $0.01 | $0.02 | $0.08 | $0.17 |
Cash flow: For the nine months ended September 30, 2020, operating activities provided $1.57 million, investing activities used $226,895 and financing activities used $576,929. Cash increased $769,795 to $1.65 million.
Liquidity and debt: Working capital was $15.04 million at September 30, 2020. The $10 million revolving facility was terminated in May, and the balance was repaid. Tecogen had a $1.87 million unsecured PPP loan outstanding, at 1% interest, classified as current and long-term debt. Total liabilities were $13.86 million; total assets were $35.25 million.
Material changes versus comparable periods
- Q3 revenue fell 17.0%. Product revenue declined 29.8%, service revenue 1.8%, and energy-production revenue 41.6%. Management attributed declines principally to COVID-related project stoppages, customer closures and idled sites; lower chiller sales were also a factor.
- Despite lower Q3 revenue and slightly lower gross profit, gross margin improved to 38.7% from 32.7%, reflecting reported manufacturing and service efficiencies. Energy-production margin weakened to 46.5% from 53.5% as sites ran fewer hours.
- Nine-month revenue declined 8.6%. Energy-production revenue fell 43.0%; product and service revenue also decreased. The nine-month operating and net losses improved substantially from 2019, but the comparison is affected by 2019 goodwill impairment of $3.69 million and a $1.08 million gain on asset sales.
- Accounts receivable decreased to $8.89 million from $14.57 million at year-end 2019, contributing to operating cash flow. Deferred revenue and accounts payable also declined. Inventory rose to $7.14 million from $6.41 million.
Outlook, risks and unusual items
- Management said current resources, including cash and operating cash flows, should meet working-capital needs for the next 12 months under its current operating plan; it also said growth may require additional debt or equity financing. No earnings or revenue guidance was provided.
- Backlog at September 30 was $10.7 million: $8.1 million in purchase orders and $2.5 million in projects with firm verbal commitments in process. The filing cautions that backlog is not necessarily indicative of future performance.
- Tecogen used all PPP proceeds for payroll, rent and utilities and applied on November 10, 2020 for forgiveness of the full $1.87 million. Forgiveness remained subject to SBA approval; if not forgiven, repayment was expected to begin no later than August 2021 under the disclosed terms.
- COVID-19 risks included delayed projects and collections, reduced customer-site operations, lower service and energy revenue, and potential further disruption. Management stated that critical manufacturing and service operations continued, while acknowledging that future effects were uncertain.
- Other notable items include a $179,944 charge for abandoned patent applications in the first quarter and a $98,403 unrealized loss on investment securities for the nine-month period. A former-subsidiary guarantee covered $78,560 of equipment-financing principal; management did not consider payments probable. Separate sale agreements include minimum-cash-flow and other contingent obligations.
- The company disclosed legal actions and anticipated actions to collect amounts owed by certain customers. It also reported disclosure controls were not effective due to an IT general-controls material weakness; remediation through a new computer system was in progress.
Important facts for investors to verify
- Whether the PPP loan was forgiven, in whole or in part, and the resulting debt and cash-flow effects.
- Whether COVID-related customer closures, project delays and slower collections persist, and how those affect revenue, margins and receivables.
- Conversion of the reported backlog into orders, installations and recognized revenue, particularly the portion based on verbal commitments.
- Cash generation and financing needs after repayment of the revolving line, including whether additional capital is required.
- Progress in remediating the disclosed IT controls material weakness and the status or potential exposure from customer collection actions and contractual guarantees.