Tecogen’s Increasing Margins In Q2 Foretells A Turnaround Story

Tecogen Inc (US: TGEN – $2.56 & GER: 2T1 – €2.26), which designs, manufactures, sells, installs, and maintains high efficiency, ultra-clean, cogeneration products, announced second quarter revenues of $7,867,396, a decline of 7% from $8,453,165 for the same period in 2018. The decline was driven by the Company’s decision to sell certain of its ADG energy producing assets at a profit back in March. Excluding the declining energy production revenues, Q2 revenues actually increased 5% from $6,944,940 to $7,289,097 for the second quarter.

Despite the decreasing revenue, gross profit increased 8% from $3,159,594 to $3,425,915. The investment community never wants to see declining year-over-year revenues; however, the increase in service revenue and in gross margin is indicative of a turnaround.

The Company has been active in signing lucrative contracts this year. Most of these contracts haven’t resulted in revenues just yet but will eventually bear fruit in the remaining two quarters of 2019 and the start of 2020. Backlog is $28 million as of August 12 and doesn’t include a large megawatt cogeneration opportunity spread among many buildings in a mostly new geography for Tecogen. A decision on this project is expected to be made in the third quarter, so investors should pay close attention for an upcoming news release.

Refrigeration plants have extremely large electrical demand and usage loads. In many application’s this load peaks in the daytime and summer, the same periods when electricity is the most expensive and natural gas supply is the most abundant. Owners can save significantly in their total energy costs by using Tecogen’s Tecofrost.

Benjamin Locke, CEO of Tecogen commented, “While the second quarter has historically seen lower revenues, we made excellent progress in terms of improving our overall margins. Our backlog is as strong as ever, and we fully expect product sales and revenues to increase in the second half of the year with the goal of maintaining full year positive adjusted EBITDA. We are also very excited about a significant opportunity for an order for upwards of 3 megawatts of InVerde cogeneration equipment that, while not in our backlog, could be decided upon in the second half of the year with resulting equipment sales in the first half of 2020. Our growing product backlog, strong service margins, and increased interest in our Ultera emission technology is exciting for the Company, and I am very enthusiastic about our prospects for the remainder of the year and into 2020.”

Second Quarter 2019 Financial Highlights

 

Three Months Ended
June 30
Six Months Ended
June 30
Amounts in $000’s
2019
2018
2019
2018
Product Revenues
2,445
2,484
5,470
6,157
Service Revenues
4,844
4,461
8,755
9,181
Energy Production
578
1,508
1,819
3,291
Total Revenues
7,867
8,453
16,044
18,629
Cost of Products Sales
1,547
1,492
3,490
3,901
Cost of Services Sales
2,530
2,962
5,005
5,745
Cost of Energy Production
365
840
1,164
1,985
Total Cost of Sales
4,441
5,294
9,659
11,631
Gross Profit
3,426
3,160
6,385
6,997
Total Operating Expenses
3,760
3,796
10,066
7,563
(Loss) from Operations
(335)
(636)
(3,682)
(565)
Net Income (Loss)
(357)
(754)
(3,637)
(734)
Earnings (Loss) Per Share
(0.01)
(0.03)
(0.15)
(0.03)
Shares Out. – Diluted
24,826
24,818
24,823
24,811
Selected income statement data for the quarters and six months ended June 30, 2019 and June 30, 2018. Source: Company Press Release

 

Product revenues in the second quarter of 2019 were $2,445,448 compared to $2,483,657 for the same period in 2018, a decrease of 2%. While cogeneration sales increased by 10%, chiller sales declined 14% year-over-year. Service revenues in the second quarter of 2019 were $4,843,649 compared to $4,461,283 for the same period in 2018, an increase of 9%. This increase was due to certain engineering service projects. Energy production revenues in the second quarter of 2019 were $578,299 compared to $1,508,225 for the same period in 2018, a decrease of 62%. This decline is attributable to the sale of a portion of the Company’s ADG energy producing assets as mentioned above.

Consolidated gross profit for the second quarter of 2019 was $3,425,915 compared to $3,159,594 in the second quarter of 2018, an increase of 8%. Overall gross margin for the second quarter of 2019 was 44% compared to 37% for the same period in 2018, an increase of seven points and above management’s targeted 35-40% gross margin range. Product gross margin decreased to 37% for the second quarter of 2019 compared to 40% for the same period in 2018. Overall service gross margin skyrocketed to 48% in the second quarter of 2019, fourteen points higher than the 34% for the same period in 2018 due to an increase in margins recognized on installation projects during the quarter. Energy production gross margin declined from 44% to 37%.

Tecogen’s net loss for the second quarter of 2019 was $357,129, compared to $754,350 for Q2 2018, an improvement of $397,221. The Company’s operating expenses decreased 1% from $3,795,880 to $3,760,497. Tecogen has managed to keep opex flat while simultaneously prioritizing the market rollout of the TecoFrost system and continuing the development of the Company’s Ultera Emissions Technology. Adjusted EBITDA, which excludes non-recurring merger related costs, goodwill impairment, mark to market adjustments and stock compensation expense, improved $124,511 from -$329,541 to -$205,030 for Q2.

 

Amounts in $000’s
June 30, 2019
June 30, 2018
Cash and Cash Equivalents
1,088
1,015
Accounts Receivable
11,629
11,441
Inventories
6,991
5,534
Total Current Assets
26,177
23,386
Property and Equipment
3,764
11,361
Intangible Assets
1,555
2,951
Goodwill
5,282
13,366
Total Assets
39,756
51,472
Revolving Line of Credit
2,558
Accounts Payable
6,235
4,962
Accrued Expenses
2,062
1,946
Total Current Liabilities
10,650
11,270
Lease Obligations
1,901
Unfavorable Contract Liability
2,754
6,783
Total Liabilities
15,402
18,372
Total Stockholder Equity
24,243
32,647
Selected balance sheet data for the quarters ended June 30, 2019 and June 30, 2018. Source: Company Press Release

 

Tecogen ended Q2 2019 with $26,177,250 in current assets against current liabilities of $10,649,607 for a very strong 2.5x current ratio. The Company currently has no debt as it was paid off from the proceeds of the sale of a portion of the ADG assets in Q1. The Company has no need to finance, unless it is to fund a substantial growth opportunity.

Tecofrost and Ultera Product Lines Are Adding To Backlog

As previously mentioned, backlog was $28 million as of August 12, 2019. This backlog figure includes the Company’s first TecoFrost order. Tecogen expects to install an improved system at a local facility in Massachusetts before the end of 2019. It adeptly chose this site as a soft launch due to its proximity to the Company’s factory in Waltham so its operations can be monitored closely. A similar soft launch is expected on the West Coast later this year. Assuming all goes to plan, the Company will be building a strong pipeline of projects for TecoFrost across the United States in 2020.

Tecogen received an order to complete the engineering of an up-sized Ultera system for use in municipal water pumping in Southern California. But the biggest near-term opportunity lies with its partnership with Caterpillar and Mitsubishi Fork Truck of America. The aim of the Ultera Emissions Technology program is to make MFCA’s forklifts certified near-zero emission engines. If successful, this will have demonstrated that the Ultera retrofitting engine can be used to make any other alternative fuel vehicle – such as propane or natural gas fleets – certified to near-zero emissions.

Conclusion: Market’s Overreaction To Q2 Results Leads To A Buying Opportunity

Despite the strong margins and improving EBITDA in a historically weak quarter for the Company, the market was not receptive to Tecogen’s Q2 results. Some investors must have been shaken by the decrease in revenue as the stock dipped to a new 52-week low. Even though the decline can be easily explained by the drop in energy production revenues due to the ADG sale. We must stress that the 10% decline seen on the stock price immediately following Tuesday’s release was only on 37,000 volume, so this wasn’t exactly a race to the exits. While painful in the short term, investors can feel confident that the declining revenue for Q2 2019 is not a trend. With the growing backlog and numerous recent deals signed, Tecogen is poised to show strong revenue growth.

We have mentioned before that TGEN is a buying opportunity and we remain steadfast in that belief despite the new 52-week low being made this week. Now is a particularly ideal time. Why? Because the contracts and growing backlog will result in revenue over the next several quarters. Just like how the market overreacted to Q2’s results in a negative fashion, it may overreact in a positive fashion this time next year.

TGEN remains an excellent investment for patient and risk-tolerant investors with at least a one year time horizon. Its thinly traded nature makes it a prime candidate for a major run towards our target price on continued positive news or demonstrated profitability and revenue growth. Smallcaps Recommendation: BUY.

Smallcaps.us Advice: BuyPrice Target: $9.41Latest Company Report (pdf)
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