TECOGEN INC. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 31, 2014. This is an annual report, not a quarterly filing. Tecogen designs, manufactures, sells, installs, and services natural-gas-fueled combined heat and power systems, chillers, and high-efficiency water heaters. It reports one business segment, with all revenue generated in the United States.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $15.85 million | $15.25 million |
| Gross profit / margin | $5.03 million / 31.7% | $5.87 million / 38.4% |
| Operating loss | $3.67 million | $2.00 million |
| Consolidated net loss | $3.81 million | $2.03 million |
| Net loss attributable to Tecogen | $3.45 million | $1.64 million |
| Basic and diluted loss per share | $0.26 | $0.12 |
| Cash used in operating activities | $3.38 million | $3.15 million |
| Cash and cash equivalents, year-end | $7.71 million | $1.57 million |
| Working capital, year-end | $5.57 million | $4.08 million |
| Total liabilities, year-end | $10.56 million | $4.33 million |
Revenue mix: Product revenue was $6.35 million, down 14.9%; service and installation revenue was $9.50 million, up 21.8%. Installation revenue rose to $2.43 million from $0.71 million. Cogeneration revenue declined to $5.20 million from $5.79 million, and chiller revenue declined to $1.15 million from $1.66 million.
Debt and funding: At year-end, liabilities included $2.95 million of related-party demand notes and line of credit and a $3.00 million senior convertible note. The latter bears 4% interest, matures in 2016, and is convertible at $5.40 per share; it was classified as current because a registration-statement effectiveness condition could trigger default provisions. The company raised $5.97 million net from common-stock sales and received $3.00 million from the convertible note during 2013. In January 2014, it repaid $1.75 million of CEO demand notes plus interest and a $1.20 million CEO credit-line balance plus interest. A separate CEO credit facility of up to $3.50 million was agreed in March 2014.
Cash flow and balance sheet: Financing activities provided $10.44 million in 2013; investing activities used $0.92 million, including $0.50 million for an acquired product line and $0.40 million for intangible assets. Receivables increased to $3.74 million, including $0.65 million of unbilled revenue. Cash included approximately $7.41 million above FDIC-insured limits. Year-end operating lease commitments totaled $5.33 million through 2024.
Material changes and unusual items
- Revenue increased 3.9%, but gross profit fell and gross margin contracted by 6.7 percentage points. Management attributed the lower margin primarily to lower-margin turnkey projects and early Ilios water-heater sales made below cost to provide demonstration units.
- Operating expenses increased 10.6% to $8.70 million, including approximately $0.44 million of additional R&D investment and $0.26 million in costs related to an aborted public offering. Reported R&D spending was approximately $0.87 million, partly offset by $0.13 million of grant reimbursements.
- Net loss attributable to Tecogen more than doubled. The company stated it had incurred annual operating losses for at least five years and expected losses to continue until sales and cost structure support profitability.
- The company issued a U.S. patent for its Ultra low-emissions technology in 2013 and acquired assets related to manufacturing the InVerde generator for $0.50 million.
- American DG Energy, an affiliate with sales-representation rights, accounted for $0.76 million of 2013 sales, versus $3.80 million in 2012. Related-party arrangements also include CEO lending and shared facilities and services.
Outlook, risks, and contingencies
Management said existing resources, including cash and expected operating cash flows, were expected to meet working-capital needs for the next twelve months, while warning that cash requirements could increase with growth and additional financing might be needed. The company did not provide numerical revenue or earnings guidance. Its growth plans rely on broader CHP adoption, favorable utility economics and policies, product development, and customer access to financing.
- Profitability and funding: Continued losses and operating cash outflows may require additional debt or equity financing, potentially on unfavorable or dilutive terms.
- Demand and execution: Sales are project-based, high-value, and variable; lengthy sales cycles, customer financing constraints, order delays, and limited manufacturing scale could affect results.
- Economics and regulation: Customer returns depend on the spread between natural-gas and electricity prices. Utility charges, interconnection rules, air-emissions requirements, incentives, or changes in regulation may help or hinder adoption.
- Operations and technology: Tecogen relies on a limited number of suppliers for key components and faces competition, product-liability and warranty exposure, and risks to intellectual-property protection.
- Controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end because of insufficient accounting expertise and limited IT access-control resources. Management did not plan immediate staffing remediation, citing cost considerations. The auditor gave no opinion on internal-control effectiveness; its audit opinion on the financial statements was unqualified.
- Commitments and legal matters: Performance-related letters of credit included $0.58 million under a bank facility and approximately $1.06 million collateralized with the CEO’s personal funds. Management reported no legal proceedings expected to have a material adverse effect.
Key facts investors should verify
- Whether operating cash burn, recurring service revenue, and gross margins improve after the 2013 mix shift toward turnkey installations.
- Current cash, receivable collectability, restricted cash, and remaining availability and terms of the CEO credit facility; confirm the effect of the January 2014 debt repayments.
- The status and terms of the $3.00 million convertible note, including registration effectiveness, any default or conversion consequences, and potential dilution.
- Progress in addressing the disclosed material weakness in financial reporting and IT controls.
- Actual customer adoption, shipment volumes, and commercial economics of Ultra, InVerde microgrid systems, and Ilios products, rather than management’s market estimates.
- Related-party sales, lending, and distribution arrangements, as well as the company’s liquidity and trading-market status; the filing stated that common stock was not traded on an exchange or quotation system.