Tecogen Revenues Grow with 33% in Second Quarter of 2017

Tecogen Revenues Grow with 33% in Second Quarter of 2017 post image

With great curiosity, investors were looking forward to Tecogen’s (TGEN – $3.27) second quarter financial results, as they were the first to be made public after the Company’s acquisition of American DG Energy (ADGE) on May 18th.

Tecogen certainly delivered on expectations. Revenue in the second quarter, ended June 30, 2017 was $7,590,540 compared with $5,687,308 for the same period in 2016. An impressive surge of 33.5% and the highest quarterly revenue ever in the Company’s history.

The merger with ADGE added $774,192 in revenue to the quarterly result. Note that this number only represents ADGE’s revenue that was earned over the six week period after the merger date on May 18th, 2017, NOT the entire quarter.

Revenue results were driven by solid growth in both product and services related revenues. Total services related revenue grew 12.9% over the prior year period, driven primarily by installation activity, while product revenue grew 29.4% compared to second quarter of 2016, helped by strong cogeneration sales.

Cost control initiatives, product upgrades and improvements, and the addition of energy production revenue from the merger with American DG Energy generated a 6.2% combined gross margin improvement in the quarter, bringing gross margin up to a solid 39.3% compared to 37.0% in the second quarter of 2016.

As a result, gross profit for the quarter increased was $3 million, up no less than 43% versus $2.1 million in the second quarter of 2016.

Despite these wonderful results, Tecogen delivered a net loss for the quarter of $293,540 compared to a loss of $415,539 in the second quarter 2016. However, when excluding non-recurring merger expenses in the quarter and non-cash depreciation and amortization, as well as stock compensation, the Company showed an adjusted EBITDA of approximately $64,000 for the quarter, an improvement of about $276,000 over the second quarter adjusted EBITDA loss in 2016, when the depreciation and amortization of Tecogen alone was much less (Also read Financials below).

Finally, the Company’s sales backlog of equipment and installations currently stands at $16.1 million, well ahead of management’s goal to exceed $10 million in product and turnkey service revenue.

Note that the backlog does not include service contract revenues, or sales of TEDOM products by the TTcogen joint venture. The backlog for TEDOM products was $813 thousand at quarter-end and had climbed to $884 thousand as of Friday, August 11th. Additionally, ADGE’s estimated undiscounted future energy production revenue, which are not included in these backlog figures, exceeds $50 million.

Tecogen Co-Chief Executive Officer Benjamin Locke commented, “Aside from one-time merger related expenses, the second quarter of 2017 is the fourth consecutive quarter of positive operating results for the company. We are pleased with these results, and hope to continue this trend through the second half of 2017.”

Highest Quarterly Revenue Ever

Product sales revenue was higher in the second quarter of 2017, posting 29.4% growth over the prior year comparable quarter. Higher cogeneration product sales accounted for over three quarters of the increase, with chiller and heat pump sales accounting for the remainder.

Services revenue grew 12.9% year-on-year, benefiting from increasing penetration in service contracts and favorable operating metrics for the installed fleet as well as an active period for installations work. This was the 18th consecutive quarter of year-over-year quarterly contract service revenue growth. These long-term contracted maintenance and service agreements, account for a substantial piece of the Company’s total revenue, providing an annuity like revenue stream.

Note that Product Revenue is derived from the sale of the various cogeneration and chiller units. Because the equipment is built to last 20 or more years, most of the product sales are to first time customers. The Company’s Service Revenue, however, lends itself to recurring revenue from long-term maintenance contracts, which provide the Company with a somewhat predictable revenue stream.

 
Three Months Ended
June 30
Six Months Ended
June 30
Amounts in $000’s
2017
2016
2017
2016
Product Revenues
3,116
2,409
5,924
4,675
Service Revenues
3,700
3,278
7,740
6,088
Energy Production
774
774
Total Revenues
7,591
5,687
14,437
10,763
Cost of Products Sales
1,966
1,767
3,723
3,320
Cost of Services Sales
2,307
1,817
4,483
3,621
Cost of Energy Production
331
331
Total Cost of Sales
4,604
3,584
8,536
6,941
Gross Profit
2,987
2,103
5,901
3,822
Total Operating Expenses
3,232
2,489
6,069
5,115
(Loss) from Operations
(245)
(386)
(168)
(1,293)
Net Income (Loss)
(294)
(416)
(249)
(1,309)
Earnings (Loss) Per Share
(0.01)
(0.02)
(0.01)
(0.07)
Shares Out. – Diluted
23,120
19,089
21,588
18,784
Selected income statement data for the quarters and six months ended June 30, 2017 and June 30, 2016. Source: Company Filing

Product sales revenue for the six months ended June 30, 2017 was $5.92 million, an increase of 27% versus $4.68 million in the comparable period in 2016. Also, Services revenue grew by 27% during the first six months of 2017 compared with the same period in 2016.

The Company’s net loss declined from $1.31 million in the first half of 2016 to $249 thousand in this year’s comparable period. Again, excluding the exceptional costs of the second quarter, this loss would have been a nice profit.

Product gross margin was 36.9% for second quarter 2017 compared to 26.6% in second quarter of 2016. Product gross margin was primarily helped by the materials and supplier arrangements put in place over the past several quarters as well as by the product mix shift toward the higher margin InVerde e+ CHP model.

Services gross margin declined to 37.6% in the period compared to the 44.6% in the prior year, as it was impacted by exceptional site-specific costing on certain installation projects.

Energy production gross margin was a strong 57.3% following the completion of the merger with American DG Energy. Energy production gross margin is expected to fluctuate materially though due to seasonality.

On a combined basis, operating expenses increased to $3,232,479 for the second quarter 2017 from $2,488,924 in the same quarter of 2016. An increase in selling expenses, which rose 81.3% to $607,511, merger related expenses of $99,773, and the consolidation of ADGE’s core overhead, accounted for most of the increase. The increase in selling expenses was due to an uptick in marketing related activity and higher sales commissions.

Depreciation and amortization jumped to $178,595 from $66,484 in the prior year. The increase is related to the depreciation of the equipment that American DG Energy owns to deliver energy to its customers and the amortization of the corresponding contracts.

Amounts in $000’s
June 30, 2017
June 30, 2016
Cash and Cash Equivalents
3,318
4,070
Accounts Receivable
8,868
6,241
Inventories
6,100
4,940
Total Current Assets
22,727
17,344
Property and Equipment
15,725
561
Intangible Assets
2,098
1,047
Excess of Cost Over Fair Value of Net Assets Acquired
12,571
Total Assets
55,586
19,051
 
 
 
Accounts Payable
4,502
2,618
Accrued Expenses
1,900
1,037
Total Current Liabilities
8,461
4,464
Promissory Note
3,149
3,124
Unfavorable Contract Liability
10,304
Total Liabilities
22,364
7,884
Total Stockholder Equity
32,735
11,167
Selected balance sheet data for the quarters ended June 30, 2017 and June 30, 2016. Source: Company Filing

Note that due to the American DG acquisition it is hard to compare the current balance sheet with the one a year ago.

The cash balance declined at quarter-end to $3,317,928, compared to $4,069,660 at the end of the second quarter in 2016. At the same time, inventory increased by over $1.1 million. This increase is primarily due to the purchase of used equipment from American DG. Although lowering inventory is a goal, management expects inventory to vary significantly based on production and customer delivery requirements.

Consolidated working capital at June 30, 2017 was $14,266,039 compared to $12,879,929 at June 30, 2016, an increase of $1,386,110.

Ultera Applications With Tremendous Potential

The efforts of Tecogen to commercialize its extraordinary emissions technology for use beyond the Company’s core products, continues to move forward.

In the first quarter of 2017, Tecogen began a research program, funded by PERC, the Propane Education and Research Council, to demonstrate the effectiveness of the Ultera emissions systems on propane fueled fork trucks.

The project has significant potential for the industry as these vehicles generally operate indoors, where health incidents are magnified. In recent years, the market share for propane trucks has been eroded by battery operated versions because of this issue. The market losses occurred despite the significant disadvantages to the battery systems. They are, for example, more costly and often unable to complete a full shift because of energy storage limitations.

So far, the Company has tested a standard propane powered fork truck to set the baseline emissions profile. These baseline tests indicated that most of the emissions output from the fork truck was during times when it was very active, such as lifting. This is a familiar problem, which the Ultera process was designed to remedy. It is therefore the Company’s believe that the Ultera technology can be very impactful to the emissions profile of the fork truck.

At this moment the Ultera system is being designed so that it can be integrated into the fork truck without being outwardly visible or intrusive. This fabrication task is nearly complete and actual testing is scheduled to begin next month.

A second application for which the Ultera technology is being developed is for use in light duty gasoline vehicles. Through the joint venture ULTRATEK – 43.09% owned by Tecogen – two phases of testing were completed, which were highly successful in demonstrating Ultera’s effectiveness. These tests were conducted at the world-renowned AVL California Technical Center and were the subject of a peer-reviewed paper presented at the SAE World Congress in May 2017.

A key finding of the research is that conventional aftertreatment systems are far less effective during periods of aggressive driving. These kinds of conditions are common in a daily driving experience but not present in the simulations used for certification tests today. The Ultera system was extremely effective in reducing the emissions to compliant values under these conditions.

This as a major benefit, especially in the EU where lab certification testing will be phased out in the next three years in favor of the RDE or Real Driving Experience protocol. The RDE will require the certification tests to be conducted on public roads through three types of conditions (rural, city, and highway), which will reduce the predictability of the vehicle operating conditions and consequently should favor the application of the robust Ultera system.

The past few months ULTRATEK has had several productive meetings with potential partners from the automotive industry. Based on the feedback from the auto industry, a more advanced Ultera device will be completed so that it can be incorporated in a vehicle and overseen by the vehicle’s control system.

The refined Ultera prototype, which will be tested in an upcoming phase 3, will be a true showcase for the system, while providing a basis for accurate costing.

Finally, after successfully developing the Ultera technology for Tecogen’s own equipment, the Company’s Research & Development team began exploring other possible emissions control applications in an effort to expand the market for the ultra-clean emissions system. Retrofit kits were developed in 2014 for other stationary engines and in 2015 the Ultera Retrofit Kit was applied successfully to natural gas stand-by generators from other manufacturers, including Generac and Caterpillar.

Historically, standby generators have not been subjected to the same strict air quality emissions standards of traditional power generation. However, generators which run for more than 200 hours per year or run for non-emergency purposes (other than routine scheduled maintenance) in some territories, such as California, are subject to compliance with the same stringent regulations applied to a typical electric utility.

In 2015, Tecogen purchased a sample generator and retrofitted it with an Ultera. The results were extremely favorable. Meanwhile, an initial customer in California applied for permits to retrofit his existing onsite units. These permits were received, and Tecogen engineers are now in the final stages of retrofitting the last generator. Meanwhile, the already retrofitted units have been unofficially tested and show robust compliance.

Third party source testing, the final permitting step, should be completed in the current quarter. The significance of a successful outcome of this program can’t be underestimated. As demand response programs become more economically attractive and air quality regulations continue to become more stringent, this could potentially be a very lucrative new market for Tecogen.

Conclusion

Tecogen’s second quarter was another impressive one with double digit product and service revenue growth.

Thanks to the successful acquisition of American DG Energy, which added the onsite utility business to Tecogen, the Company is now completely vertically integrated, making it a clean technology company able of offering equipment design, manufacturing, installation, financing and long-term maintenance service. The ADGE fleet will contribute steady, annuity type revenue to supplement Tecogen’s revenues.

With the merger completed, maintenance of the ADGE fleet has been incorporated into Tecogen’s operations. This integration has gone well and as a result, thermal and electricity production of the ADGE chillers and CHP systems, collectively increased 22% year-over-year in the second quarter.

Moreover, the Tecogen staff is beginning to identify and implement cost saving measures that are attainable as a consolidated Company. This will be an ongoing effort through the remainder of the year, with the aim to achieve significant cost reductions.

Despite ongoing cost saving measures, the Company is exploring advanced sales acceleration tools to help generate new leads and streamline lead qualification and project development. For example, Tecogen continues to build relationships with new and existing energy service companies (ESCOs) that provide comprehensive energy savings programs for customers. Traditionally, these companies provide savings via lighting, solar and other efficiency measures. But increasingly, CHP systems are incorporated because of their tremendous savings potential.

Another rapidly emerging opportunity for growth is indoor agriculture, particularly for the TECOCHILL line of natural gas powered chillers. These facilities have tremendous electrical needs because of the lighting, cooling and dehumidification requirements of the plants. Consequently, electricity is a major expense in running these facilities.

To date, Tecogen has inked six transactions in the cannabis space for a total of 12 chillers, and with a total sales value of over $2.3 million. More chiller sales are expected during the coming months in the marijuana sector.

This is truly an exciting time for Tecogen and its shareholders. Its sales are growing substantially, the positive impact of the ADGE acquisition will improve quarter by quarter, and success with only one of the Ultera applications will take the Company into another category. If you don’t own shares of Tecogen yet, now is the time. Recommendation BUY.

Smallcaps.us Advice: BuyPrice Target: $8.97Latest Company Report (pdf)
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1 comment… add one
  • Chris Johnson August 21, 2017, 1:34 am

    John,

    My best one of your group is ACU. I got it before I knew you recommended. It has been marvelous! As so many good companies they experienced hard times but managed to become successful. The patient investor is successful! Spill Magic was a very smart move. They just continue to excel for the management is top notch. Can”t understand why a company hasn’t acquired them a long time ago!

    It will be interesting if they announce a stock split; wouldn’t be surprised!

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