TECOGEN INC. — Q1 2015 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Tecogen designs, manufactures, sells, and services natural-gas-fueled combined heat and power and chiller systems, including turnkey installation projects. It reports one business segment and consolidates its 65%-owned subsidiary, Ilios Inc.
Financial performance
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $6.10 million | $4.22 million |
| Gross profit / margin | $2.22 million / 36.5% | $1.43 million / 33.8% |
| Operating expenses | $2.86 million | $2.47 million |
| Operating loss | $632,000 | $1.05 million |
| Net loss attributable to Tecogen | $617,000; $0.04 per share | $1.02 million; $0.07 per share |
| Cash used in operating activities | $505,000 | $2.15 million |
| Cash and cash equivalents | $1.98 million | $1.19 million at Dec. 31, 2014 |
| Restricted short-term investments | $586,000 | $586,000 at Dec. 31, 2014 |
| Working capital | $8.19 million | $7.22 million at Dec. 31, 2014 |
| Total liabilities | $8.48 million | $8.30 million at Dec. 31, 2014 |
Revenue rose 44.8%. Product revenue increased 81.9% to $3.54 million, mainly from higher cogeneration sales; service revenue increased 13.0% to $2.57 million. Gross margin improved 2.7 percentage points. Operating expenses rose 15.5%: general and administrative expense increased 25.4%, selling expense 17.1%, while R&D fell 42.8% following completion of a heat-pump development project and its move toward production. Interest expense was $30,000. No income-tax benefit or provision was recorded.
Operating cash outflow narrowed year over year, but cash from financing was an important source of liquidity: the company received approximately $997,000 from common-stock sales and $360,000 from option exercises. Investing activities used $55,000. Accounts receivable increased $660,000 during the quarter, while deferred revenue declined $765,000.
Debt, liquidity, and capital
The company had a $3.0 million senior unsecured related-party convertible note outstanding, bearing 4% annual interest and due December 31, 2016 if not converted. It is convertible at $5.40 per share; the filing reports 555,556 shares issuable upon conversion. The note has a 120% prepayment provision and change-of-control terms. No principal repayment is reported for the quarter.
Management said existing resources, including its line of credit and cash flows from operations, should cover short-term working-capital needs. It also expects cash requirements to rise with growth and says additional equity capital will be needed for future operating and capital needs. The company sold 210,526 shares at $4.75 per share in a January private placement for $1.0 million gross proceeds; the cash flow statement reports $997,000 net proceeds from stock sales.
Outlook, risks, and unusual items
- Management expects growth in sales volume and more turnkey projects to support further gross-margin improvement. No numerical earnings or revenue guidance was provided.
- Product and installation backlog was $10.1 million at March 31: $6.3 million in purchase orders and $3.8 million in projects with completed customer approval, allocated funding, and firm verbal commitments. The filing cautions that backlog may not predict future performance and that its presentation may differ from other companies’.
- Management cited possible difficulty raising capital due to market conditions, interest rates, lender availability or financial condition, and investor perceptions. If financing is unavailable, growth could be constrained and the company may need to suspend or significantly reduce operating costs.
- Disclosure controls were deemed ineffective due to material weaknesses: insufficient accounting expertise for complex accounting and reporting, and limited personnel overseeing IT general controls and user access. No remediation changes had been made as of March 31; management planned action as resources became available.
- A $1.055 million letter of credit supported project performance bonds using collateral pledged by Co-CEO John Hatsopoulos. The collateral requirements were lowered and the letter of credit canceled on April 10, 2015, after quarter-end. A separate $583,073 letter of credit remained outstanding at quarter-end to collateralize a performance bond.
- The company recorded no loss on percentage-of-completion contracts in Q1 2015, compared with an approximately $217,000 loss in Q1 2014. Results for the interim period are not necessarily indicative of full-year results. Management also described seasonal demand patterns for heating, cooling, and service work.
Key facts for investors to verify
- Whether the $10.1 million backlog converts to orders, shipments, and collected cash, particularly the $3.8 million based on firm verbal commitments rather than purchase orders.
- Receivables, collections, and operating cash use, given the $660,000 quarterly increase in accounts receivable and continued operating cash outflow.
- Plans and timing for additional financing, expected dilution, and the terms and status of the related-party convertible note.
- Progress in addressing the disclosed accounting and IT-control material weaknesses.
- Current status and collateral requirements of project letters of credit and performance bonds, including the separate $583,073 letter of credit.