TECOGEN INC. — Q2 2014 Form 10-Q
Business context and reporting period. Tecogen designs, manufactures and services natural-gas-fueled combined heat and power systems, chillers and related products. This unaudited filing covers the quarter and six months ended June 30, 2014, with comparisons to 2013. The company reports one business segment and consolidates its majority-owned subsidiary, Ilios.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2014 (2013) | $4.54 million ($2.80 million), up 61.9% | $8.76 million ($6.85 million), up 27.8% |
| Gross profit / margin, 2014 (2013) | $1.35 million / 29.7% ($0.81 million / 29.0%) | $2.77 million / 31.7% ($1.93 million / 28.1%) |
| Operating loss, 2014 (2013) | $1.22 million ($1.15 million) | $2.28 million ($2.11 million) |
| Net loss attributable to Tecogen, 2014 (2013) | $1.23 million ($1.09 million); loss per share $0.08 in both periods | $2.27 million ($1.95 million); loss per share $0.15 in both periods |
- Six-month product revenue rose 38.2% to $3.95 million; service revenue rose 20.4% to $4.80 million. Q2 product revenue increased 149% and service revenue 27% year over year.
- Operating expenses rose to $5.06 million for the first half from $4.04 million, including higher public-company, sales commission and staffing costs. R&D was $0.56 million, with no government grant offsets in 2014.
- Cash and cash equivalents were $3.38 million at June 30, down from $7.71 million at year-end; restricted short-term investments were $0.58 million. Working capital was $8.51 million.
- First-half operating cash use was $2.92 million, versus $0.68 million in 2013. Investing used $0.82 million; financing used $0.60 million, including repayment of $2.95 million in CEO-related demand notes, partly offset by $2.35 million of stock-sale proceeds.
- Total liabilities were $7.98 million, including a $3.00 million senior unsecured convertible note due in 2016, bearing 4% interest and convertible at $5.40 per share. No demand notes or line-of-credit borrowings remained outstanding at June 30.
Material changes, outlook and risks
- Management attributed stronger revenue to increased cogeneration and chiller sales and greater installation activity. It said higher volume and turnkey projects supported improved gross margins; however, higher operating expenses exceeded the gross-profit improvement, widening losses.
- At June 30, backlog was reported as $11.7 million: $6.0 million in received purchase orders and $5.7 million in projects with allocated resources and firm verbal commitments. Backlog excludes service contracts and is not necessarily indicative of future results.
- Management expected existing resources to cover short-term working-capital needs, but said growth would require additional capital, potentially through equity financing. It warned that inability to raise capital could constrain growth or require cost reductions. Inventory growth to support backlog and turnkey work contributed to cash use.
- A $3.5 million CEO-provided working-capital line was available only upon specified events. The filing states that conditions triggering its use were fulfilled by the July 2 registration-statement effectiveness and May stock offering; absent a separate specified default, the line would not be drawn before expiration.
- The May 2014 public offering sold 647,706 shares at $4.75, for approximately $3.0 million gross proceeds; net proceeds were intended for working capital, turnkey expansion, Ilios manufacturing, low-emissions technology and product development. The company also completed its NASDAQ listing under ticker TGEN.
- Material weakness: management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, citing insufficient accounting expertise and limited IT general-control staffing. Management had not made changes to the control process and planned remediation as resources became available.
- Contingencies include performance bonds; a CEO-owned account collateralized approximately $1.055 million of letters of credit for construction projects. The company reported $5.04 million of future operating lease payments. A new service-center lease in Valley Stream, New York, was signed in August 2014.
- Other items: the company recorded expected turnkey contract losses of approximately $217,000 in the first half, recognized in Q1 and not increased in Q2. Management reported no goodwill or long-lived asset impairment indicators requiring a test during the period.
Key facts for investors to verify
- Whether sales growth, backlog conversion and gross-margin gains continue, and how much backlog consists of firm purchase orders versus verbal commitments.
- Cash burn, working-capital needs and access to future financing; confirm the terms and availability of the contingent CEO credit line.
- Progress remediating the disclosed material weaknesses in financial reporting and IT controls.
- Terms and ongoing related-party arrangements, including the Michaelson convertible note and agreements with affiliated American DG Energy.
- Performance-bond and lease obligations, and whether turnkey project costs or completion risks change.