TECOGEN INC. — Q2 2013 Form 10-Q
Business and period: Tecogen designs, manufactures and services natural-gas-fueled combined heat and power and chiller systems. This unaudited report covers the quarter and six months ended June 30, 2013. The company also consolidates Ilios, in which it held a 63.7% interest.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2013 | $2.80 million | $6.85 million |
| Revenue, 2012 | $3.38 million | $6.64 million |
| Gross profit / margin, 2013 | $814,000 / 29.0% | $1.93 million / 28.1% |
| Gross profit / margin, 2012 | $1.39 million / 41.0% | $2.80 million / 42.2% |
| Operating loss, 2013 | $1.15 million | $2.11 million |
| Net loss attributable to Tecogen, 2013 | $1.09 million | $1.95 million |
| Loss per share, basic and diluted | $0.08 | $0.15 |
For the six months, operating cash outflow was $676,000, versus $2.19 million in the prior-year period. Investing activities used $627,000; financing activities used $350. Cash and cash equivalents fell to $270,000 from $1.57 million at year-end 2012. Working capital was $1.21 million, down from $4.08 million.
At June 30, total liabilities were $5.56 million, including $1.34 million in demand notes payable to related parties and $90,967 in current related-party convertible debentures. Current assets were $6.63 million and current liabilities $5.42 million. Inventory was $3.73 million; accounts receivable was $1.90 million. Total stockholders’ equity was $2.58 million.
Changes versus prior comparable periods
- Q2 revenue declined 17.2%, driven by a 40.1% drop in product revenue; service revenue declined 2.0%. The company attributed the product decline to lower shipment volume.
- Six-month revenue increased 3.2%; product revenue rose 0.8% and service revenue rose 5.0%. Product mix shifted: six-month cogeneration sales increased while chiller sales decreased.
- Margins contracted materially: gross margin fell 12.0 percentage points in Q2 and 14.1 points for the six-month period. Lower margins contributed to larger operating losses.
- Six-month operating expenses increased 5.6% to $4.04 million. General and administrative expense rose 3.4%, and selling expense rose 21.5%.
- Six-month interest expense increased to $59,764 from $35,604, primarily due to additional demand notes issued in late 2012.
Outlook, risks and unusual items
- Management reported a $9.7 million product and installation backlog as of August 9, 2013, excluding service contracts, and expected approximately 68% to be recognized as revenue in the second half of 2013. These are expectations, not guarantees.
- Management said current resources, including the credit line and anticipated operating cash flows, should meet working-capital needs for the next 12 months, but noted that growth may require additional debt or equity financing. Inventory buildup to support production was tightening working capital.
- On August 13, 2013, the CEO-related revolving credit facility was increased from $1.0 million to $1.5 million. The company reported $650,000 borrowed as of August 13, at 4.75%; repayment is due March 31, 2014. This subsequent-period borrowing is not reflected in June 30 cash or debt balances.
- Demand notes totaling $1.34 million are payable upon demand and accrue interest at 5%–6%. The $90,967 debenture balance was due September 24, 2013. The CEO is the primary demand-note lender, creating related-party financing dependence.
- The six-month results include an approximately $300,000 anticipated loss on a turnkey project, recognized under the percentage-of-completion method, and promotional Ilios units sold below cost.
- Noncancelable operating lease commitments totaled $5.63 million through 2024. The company reported no off-balance-sheet arrangements.
- Management concluded disclosure controls and internal control over financial reporting were not effective at June 30, citing material weaknesses in accounting expertise and IT general controls. No remediation changes had been made by the filing date; management said it would address weaknesses as resources permit.
- After quarter-end, the company effected a one-for-four reverse stock split on July 22, 2013; reported per-share and share data were retroactively adjusted. It also renewed its facilities and support agreement with affiliate American DG Energy for one year beginning July 1, 2013.
Investor verification points
- Confirm the timing, collectability and revenue conversion of the reported backlog, especially the expected second-half recognition.
- Review turnkey project cost estimates and remaining exposure to losses, along with the effect of below-cost promotional sales on margins.
- Verify liquidity after the $650,000 credit-line draw, repayment terms and the status of demand notes and the debenture due in September 2013.
- Assess related-party transactions and balances, including the CEO credit facility and American DG Energy prepayments, amounts due and commercial arrangements.
- Track remediation of the disclosed material weaknesses and assess the reliability of financial reporting controls.
- Evaluate whether operating cash generation and financing capacity are sufficient to support inventory, lease commitments and planned growth.