TECOGEN INC. — Q1 2016 Form 10-Q
Business context and reporting period. Tecogen designs, manufactures, sells, and supports natural-gas-fueled combined heat and power systems, chillers, and related services. The unaudited quarter ended March 31, 2016, compared with the three months ended March 31, 2015. The company reports one business segment and consolidates its 65%-owned subsidiary, Ilios.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $5.08 million | $6.10 million |
| Gross profit / margin | $1.72 million / 33.9% | $2.22 million / 36.5% |
| Operating loss | $0.91 million | $0.62 million |
| Net loss attributable to Tecogen | $0.89 million; $0.05 per share | $0.62 million; $0.04 per share |
| Cash used in operating activities | $1.15 million | $0.50 million |
| Cash and cash equivalents, quarter-end | $4.25 million | $1.98 million at March 31, 2015 |
Product revenue was $2.27 million, down 35.9%, including cogeneration revenue of $1.42 million and chiller/heat pump revenue of $0.85 million. Service revenue rose 9.5% to $2.81 million, primarily from service contracts. Total cost of sales was $3.36 million, down 13.5%; operating expenses were $2.63 million, down 7.7%. Interest and other expense, net, was $39,490. No income tax benefit or provision was recorded; tax benefits on losses were fully reserved.
At March 31, 2016, working capital was $13.11 million, versus $13.98 million at December 31, 2015. Current assets were $17.55 million and current liabilities $4.44 million. The balance sheet reported a $2.96 million related-party senior convertible note, net of debt issuance costs. The note’s stated principal was increased to $3.15 million in an April 1 amendment. The company had not borrowed under its separate $2 million related-party credit facility as of the filing.
Cash declined $1.23 million during the quarter. Investing activities used $75,330, mainly for property, equipment, and intangible assets; financing activities used $6,150. Accounts receivable increased by $601,447 from year-end, while accounts payable declined by $934,598.
Material changes and management commentary
- Revenue fell 16.8% year over year, driven by a $1.27 million decline in product sales, including a $1.15 million decline in cogeneration sales. Service revenue increased $243,808.
- Gross margin fell 2.6 percentage points. Management attributed the reduction to a single installation project, said it expected prior margin improvements to return in subsequent periods, and expected higher sales volume to improve margins.
- General and administrative expense declined 13.0%, which management attributed largely to efforts to lower overhead. Selling expense rose 4.3%, and research and development expense rose 24.3% as new product-improvement engineering programs began.
- The company recorded an approximately $155,200 loss on percentage-of-completion contracts, compared with no such loss in Q1 2015. It also recognized $140,600 of bill-and-hold revenue, versus none in the prior-year quarter.
- Product and installation backlog, excluding service contracts, was $10.73 million at March 31: $3.98 million in purchase orders and $6.75 million in projects with completed customer internal approvals, allocated resources, and firm verbal commitments. The filing cautions backlog is not necessarily indicative of future performance.
- Management described seasonal demand patterns: service activity is generally busiest from May through September. No numerical revenue or earnings guidance was provided.
Risks, contingencies, and subsequent events
- Management concluded disclosure controls and procedures were not effective because of material weaknesses: insufficient accounting expertise for complex GAAP and reporting matters, and limited personnel overseeing IT access and security controls. No remediation changes had been made during the quarter; management planned to address the weaknesses as resources became available.
- On April 1, the related-party convertible note was amended to increase principal by $150,000, extend maturity to December 28, 2018, and change the conversion price from $3.37 to $3.54 per share. The company was evaluating the accounting impact.
- On April 11 and 13, Tecogen issued 576,321 shares in exchanges for Ilios shares; the accounting impact was still being determined. Effective May 3, Tecogen entered into an agreement to merge Ilios into Tecogen and assume its assets, liabilities, contracts, and obligations.
- Tecogen’s 50%-owned Ultera emissions-technology joint venture reported $368,500 of expenses for the quarter. The filing says Tecogen does not guarantee the venture’s obligations or have a funding obligation, though it may elect to provide support in the future.
Investor verification points
- Assess whether product-sales weakness and operating cash burn persist, and whether service-contract growth can offset them.
- Verify the composition, conversion to orders, and timing of the disclosed backlog; a substantial portion was based on firm verbal commitments rather than purchase orders.
- Review the installation-project loss and management’s expectation that gross margins will recover.
- Confirm the final accounting and terms of the note amendment, Ilios share exchanges, and Ilios merger, including any resulting dilution or assumed liabilities.
- Monitor remediation of the disclosed financial-reporting and IT-control material weaknesses.