TECOGEN INC. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited; the auditor issued an unqualified opinion on the statements but did not opine on internal-control effectiveness.
Business context
Tecogen designs, manufactures and services natural-gas engine-driven combined heat and power (CHP) systems, chillers and high-efficiency water heaters. Its majority-owned subsidiary Ilios develops heating products; Tecogen owned 65% at year-end. The company reported one business segment and an installed base of more than 2,100 units. Common stock was not trading on an exchange or electronic quotation system at the filing date.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $15.254 million | $11.065 million |
| Product revenue | $7.453 million | $4.569 million |
| Service revenue | $7.801 million | $6.496 million |
| Gross profit / margin | $5.865 million / 38.4% | $4.886 million / 44.2% |
| Operating loss | $2.004 million | $1.883 million |
| Net loss attributable to Tecogen | $1.637 million | $1.575 million |
| Basic and diluted loss per share | $0.03 | $0.03 |
| Cash used in operating activities | $3.153 million | $2.410 million |
- Revenue rose 37.9%. Product revenue increased 63.1%, primarily from cogeneration sales; chiller revenue fell by $170,142. Service revenue increased 20.1%.
- Gross margin declined 5.8 percentage points, which management attributed mainly to lower-margin cogeneration units sold to an affiliated company. Operating expenses increased 16.2%, including higher payroll, selling, professional, R&D and promotional costs.
- At December 31, 2012, cash and cash equivalents were $1.573 million, restricted short-term investments were $181,859, and working capital was $4.079 million. Cash was down from $3.019 million a year earlier.
- Total liabilities were $4.334 million. Related-party demand notes were $1.338 million, including $1.3 million owed to CEO John Hatsopoulos; they bear 5%–6% interest and are payable upon demand. Related-party convertible debentures of $90,967 were due September 24, 2013. Interest payable to related parties was $126,170.
- Operating cash use reflected, among other items, increases in receivables and inventory. Receivables reached $2.700 million and inventory $3.357 million at year-end. Financing activities provided $1.585 million, including stock sales, Ilios share sales and related-party borrowing.
Outlook, commentary and material risks
- Management said existing resources, including cash and expected operating cash flows, should meet working-capital needs for the next 12 months, while warning that growth may require additional debt or equity financing. The filing also says cash requirements may increase and funding may not be available on favorable terms.
- After year-end, Tecogen received $827,747 in advance from a related party for 2013 purchases of modules, parts and services, with a 6% annual discount on deposit balances. It also secured a $1 million working-capital line from the CEO on March 25, 2013.
- The company reported operating losses in each of the prior five fiscal years and expected losses to continue until sales and cost structure support profitability. It stated that it might never become profitable.
- Sales are high-value, low-volume and timing-sensitive; customer financing, order delays or cancellations, and changing natural-gas/electricity price spreads can affect demand and results. One customer represented 24.9% of 2012 revenue; American DG Energy, an affiliate, accounted for $3.796 million of 2012 sales.
- Management identified a material weakness in financial reporting controls: insufficient accounting expertise for complex reporting and limited IT-security and access-control staffing. Disclosure controls and internal control over financial reporting were assessed as ineffective at year-end; management said remediation would be considered as resources allow.
- Other principal risks include dependence on key suppliers, related-party financing and sales arrangements, competition, regulatory and interconnection requirements, product warranty/liability exposure, and the possibility that pending patents for Ultra low-emissions technology will not be granted. The company disclosed no material litigation and no material off-balance-sheet arrangements.
- Management highlighted commercialization of Ultra low-emissions systems, microgrid capability and a planned advanced 35-kW engine for potential product introduction in 2014. It cited federal and state CHP policies and incentives as possible market drivers, not guaranteed demand.
Important facts for investors to verify
- Whether Tecogen can reduce cash burn, improve gross margin and progress toward profitability, particularly as sales grow.
- Receivable collectability, inventory conversion, backlog fulfillment and the concentration of revenue with the 24.9% customer.
- Repayment terms and ongoing availability of callable CEO notes and the $1 million related-party credit line, and the conditions attached to the customer prepayment.
- Whether the company remediates the disclosed material weakness and strengthens financial-reporting and IT controls.
- Commercial adoption, performance and permitting of Ultra and microgrid products, and the status of related patent applications and development milestones.
- Terms, pricing and governance of transactions with affiliates, especially American DG Energy, and the impact of affiliated sales representation rights.