TECOGEN INC. — Q1 2014 Form 10-Q
Business and period: Tecogen designs, manufactures and supports natural-gas-fueled combined heat and power systems, chillers and related services. This unaudited report covers the three months ended March 31, 2014, compared with the same 2013 quarter. The company reports one business segment and consolidates its 65%-owned subsidiary, Ilios.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 or prior balance-sheet date |
|---|---|---|
| Revenue | $4.216 million | $4.046 million |
| Gross profit / margin | $1.426 million / 33.8% | $1.112 million / 27.5% |
| Operating expenses | $2.474 million | $2.071 million |
| Operating loss | $(1.048) million | $(0.959) million |
| Net loss attributable to Tecogen | $(1.020) million; $(0.07) per share | $(0.860) million; $(0.07) per share |
| Cash used in operations | $(2.153) million | $(0.256) million |
| Cash and short-term investments | $2.531 million | $7.714 million cash at Dec. 31, 2013 |
| Working capital | $4.609 million | $5.566 million at Dec. 31, 2013 |
Service revenue rose 13.9% to $2.271 million, while product revenue fell 5.3% to $1.945 million. Higher installation activity contributed to revenue growth and improved gross margin. Product mix can vary materially because sales are high-value and low-volume. General and administrative expense rose 14.5% to $2.052 million; selling expense rose 50.9% to $0.422 million. Tecogen recorded no income-tax benefit or provision; tax benefits from losses were fully reserved.
Cash fell to $1.947 million from $7.714 million at year-end. Q1 investing cash use was $0.676 million, including $0.584 million of short-term investments to support performance bonds. Financing cash use was $2.938 million, principally repayment of $2.950 million in related-party demand notes and credit-line borrowings. Receivables were $4.250 million, inventory $3.473 million, and accounts payable $1.864 million at quarter-end.
Material changes, outlook and risks
- Revenue increased 4.2% year over year, but the loss attributable to Tecogen widened by $0.160 million as operating expenses and interest expense increased. Management attributed higher G&A costs to increased R&D, public-company preparation and financing-related costs; selling costs also rose.
- At May 15, 2014, backlog of products and installation projects was reported as $11 million: $5.7 million in purchase orders and $5.3 million in firm verbal commitments undergoing order execution. The filing cautions that backlog is not necessarily indicative of future performance and excludes service contracts.
- Management said existing resources, including cash and available credit, should meet short-term working-capital needs under its current operating plan, but expected cash requirements to increase with growth and said additional equity capital would be needed for future operating and capital needs. No specific revenue or earnings guidance was provided.
- A new $3.5 million working-capital line from CEO John Hatsopoulos, secured March 26 and available for specified events, was undrawn through May 1; it matures March 25, 2015. The company had repaid earlier CEO-related demand notes and credit-line borrowings during Q1.
- The $3 million senior unsecured convertible note bears 4% interest and matures December 31, 2016 if not converted. It is classified as current because failure to obtain an effective resale registration statement within one year of funding could constitute an event of default; the filing says effectiveness is outside the company’s control. Default terms can increase interest and permit a 120% prepayment amount. The note is convertible at $5.40 per share.
- Management reported that disclosure controls and internal control over financial reporting were ineffective due to material weaknesses involving accounting expertise and limited IT general controls. Management said it had made no process changes as of March 31 and would address remediation as resources became available.
- Other exposures include $5.184 million of future operating lease payments through 2024 and performance-bond support: a $0.583 million letter of credit and approximately $1.055 million supported by the CEO’s personal account. The bonds may be drawn if projects are not completed according to contract. Related-party sales to American DG Energy were $0.485 million in Q1; $0.306 million was due from related parties at quarter-end.
Important facts for investors to verify
- Cash consumption, collections and working-capital needs, particularly receivables, inventory and turnkey-project billing.
- Availability and conditions of the CEO’s $3.5 million credit line, and the company’s stated need for future equity financing.
- Status and timing of the convertible note’s resale registration statement, potential default consequences and maturity or conversion terms.
- Quality and conversion of backlog, especially the $5.3 million of verbal commitments, and performance against installation-project obligations.
- Remediation progress for the disclosed material weaknesses and the effect of related-party transactions and customer balances.