TECOGEN INC. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Tecogen designs and sells commercial and industrial cogeneration systems, provides installation and maintenance services, and sells energy under long-term customer contracts.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $8.67 million | $7.94 million | $24.71 million | $26.57 million |
| Gross profit / margin | $2.83 million / 32.7% | $2.88 million / 36.3% | $9.22 million | $9.88 million |
| Operating loss | $0.54 million | $0.56 million | $4.22 million | $1.13 million |
| Net loss attributable to Tecogen | $0.59 million | $0.60 million | $4.22 million | $1.34 million |
| Loss per share, basic and diluted | $0.02 | $0.02 | $0.17 | $0.05 |
Q3 revenue increased 9.2%, led by product sales, especially chillers, and higher service revenue. Nine-month revenue fell 7.0%, chiefly because energy production revenue declined following asset sales. Nine-month results included a $3.69 million goodwill impairment and a $1.08 million gain on asset sales.
Cash flow, liquidity and debt
- Cash was $780,740 at September 30, 2019, versus $272,552 at December 31, 2018. Working capital was $15.02 million, up from $13.17 million.
- Operating activities used $3.23 million of cash in the first nine months, compared with $2.36 million used in the prior-year period. Investing activities provided $4.81 million, including $5.0 million of reported sale proceeds; financing activities used $1.08 million, mainly from net line-of-credit repayments.
- Outstanding revolving credit was $940,576 under a secured facility of up to $10 million, subject to borrowing-base availability. The facility matures in May 2021. The company reported compliance with its financial covenants at quarter-end.
- Total liabilities were $16.14 million. Balance-sheet lease obligations were $2.29 million, recognized following adoption of the new lease accounting standard in 2019.
Material changes and management commentary
- Q3 Products and Services revenue rose, but segment gross margin fell to 31.0% from 35.0%. Management attributed lower product margin partly to a discounted sale of the first Tecofrost unit; installation-project margins also varied.
- Energy Production revenue declined 56.7% in Q3 and was lower for the nine-month period after the sale of eight power purchase agreements and related energy assets. The company reported aggregate consideration of $7 million for the asset sales and recorded $5.0 million of sale proceeds in investing cash flow.
- At September 30, product and installation backlog was $28.6 million: $22.9 million in purchase orders and $5.6 million in projects with a firm verbal commitment and customer approval/resources. The filing cautions that backlog is not necessarily indicative of future results.
- Remaining performance obligations were approximately $25.1 million; the company expected to recognize about 94% over the next 24 months. This excludes specified maintenance and energy-production contracts.
- No numeric earnings or revenue guidance was provided. Management cited cost control, ongoing Tecofrost and industrial refrigeration work, and potential commercialization of Ultera emissions technology for certain non-stationary applications.
Risks, contingencies and unusual items
- Asset-sale agreements include minimum cash-flow guarantees, potential make-whole obligations if energy-contract counterparties default or terminate early, and certain decommissioning-cost responsibilities. A $350,000 reserve recorded in Q1 had declined to $30,352 by September 30.
- Tecogen guaranteed approximately $145,000 of former subsidiary EuroSite Power equipment-financing principal, due in installments through September 2021, and certain customer-contract performance obligations. Management said it did not believe payment under the guarantees was probable.
- Management concluded disclosure controls and procedures were not effective because of a material weakness involving general IT controls and a small number of individuals. Remediation, including implementation of a new computer system, was ongoing as resources became available.
- The filing reports no material subsequent events and no material pending legal proceedings; previously disclosed litigation concerning the American DG Energy merger had been dismissed.
Important facts for investors to verify
- How much cash and borrowing availability remain after continued operating cash use, and whether the company stays within its credit-facility covenants.
- Whether the reported backlog converts into firm orders and revenue, particularly the $5.6 million represented by verbal commitments.
- The expected financial impact of the energy-asset sale guarantees, counterparty obligations, and remaining decommissioning exposure.
- Progress in remediating the material weakness in IT general controls.
- Whether product and service margins recover, and how reduced owned energy-production assets affect recurring revenue and cash flow.