TECOGEN INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Tecogen designs, manufactures, sells and services natural-gas-fueled combined heat and power (CHP) and cooling systems. The unaudited statements consolidate Ilios; Tecogen acquired the remaining Ilios shares in an exchange completed in May 2016.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $5.69 million | $6.38 million | $10.76 million | $12.49 million |
| Gross profit / margin | $2.10 million / 37.0% | $2.14 million / 33.5% | $3.82 million / 35.5% | $4.37 million / 35.0% |
| Operating loss | $386,030 | $302,315 | $1.29 million | $934,306 |
| Net loss attributable to Tecogen | $415,539 | $362,839 | $1.31 million | $980,303 |
| Basic and diluted loss per share | $0.02 | $0.02 | $0.07 | $0.06 |
Q2 revenue fell 10.9%; product revenue declined 28.0%, mainly due to lower cogeneration sales, while service revenue rose 7.9%. For the first half, revenue fell 13.8%; product revenue declined 32.1% and service revenue increased 8.6%. Q2 gross margin improved, but lower revenue reduced gross profit and increased the operating loss. First-half operating expenses declined 3.5% overall, including lower general and administrative and R&D costs.
Cash, liquidity and debt
- Cash and cash equivalents were $4.07 million at June 30, down from $5.49 million at year-end; short-term investments were zero, versus $295,000 at year-end.
- Working capital was $12.88 million, compared with $13.98 million at December 31, 2015. Current assets were $17.34 million and current liabilities $4.46 million.
- Cash used in operations was $1.43 million for the first six months, versus $842,000 in 2015. Investing activities used $152,000; financing activities provided $160,000. Cash decreased by $1.42 million.
- Total liabilities were $7.88 million. The senior related-party convertible note had a balance-sheet carrying amount of $3.12 million; its $3.15 million principal bears 4% interest and, as amended, is due December 28, 2018. A separate related-party credit line of up to $2 million had not been drawn.
Outlook, risks and notable items
- Management expects sales volume growth and product upgrades to improve gross margins, but gave no numerical earnings or revenue guidance. The filing cautions that interim results are not necessarily indicative of full-year results.
- Backlog, excluding service contracts, was reported at $14 million: $6 million in purchase orders and $8 million in projects with completed customer approval and firm verbal commitments. The company warns that backlog is not necessarily indicative of future performance.
- Q2 included $2.19 million of revenue recognized through bill-and-hold transactions; none was reported in Q2 2015. A first-half turnkey-contract loss of about $66,000 was recorded, reduced following a project-scope change.
- Tecogen completed the Ilios share exchange and merger, issuing 670,464 Tecogen shares to acquire the remaining Ilios interest. It also formed a 50/50 joint venture with Tedom to market a broader range of CHP products. The Ultera emissions-technology joint venture is accounted for under the equity method; Tecogen states it has no obligation to fund its losses. In August, Tecogen invested $2 million in that venture after warrant exercises by Tecogen warrant holders.
- Management reported that disclosure controls were ineffective due to material weaknesses involving insufficient accounting expertise and limited IT general-control staffing. No remediation changes had been made during the quarter. Income tax benefits from losses were fully reserved; no tax provision or benefit was recorded.
- The company reported no off-balance-sheet arrangements. Its business is seasonal in certain respects, including higher service demand during warmer months.
Important facts for investors to verify
- Reconcile the Q2 net-loss comparison: the financial statements show attributable net loss increasing from $362,839 to $415,539, while the MD&A states an increase of $328,404. The $328,404 increase matches the first-half comparison, not Q2.
- Confirm the proceeds from July 2016 warrant exercises: the filing states 650,000 warrants at $4.00 per share and describes proceeds of $2.7 million; those disclosed quantities do not arithmetically reconcile.
- Assess the quality and expected timing of the $14 million backlog, particularly the $8 million represented by firm verbal commitments rather than purchase orders.
- Monitor operating cash use, receivable collections, and whether management can remediate the disclosed material weaknesses.
- Review the terms and potential dilution from the convertible note, outstanding warrants and options, and the cash and obligations associated with joint ventures.