TECOGEN INC. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 14, 2013. Tecogen designs, manufactures and services natural-gas-fueled combined heat and power systems. Financial statements are unaudited and consolidate the Company and its 65%-owned subsidiary, Ilios.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2.89 million | $3.05 million | $9.74 million | $9.69 million |
| Gross profit / margin | $1.09 million / 37.8% | $1.18 million / 38.8% | $3.02 million / 31.0% | $3.99 million / 41.1% |
| Operating loss | $(1.41) million | $(0.76) million | $(3.53) million | $(1.78) million |
| Net loss attributable to Tecogen | $(1.39) million | $(0.67) million | $(3.34) million | $(1.51) million |
| Loss per share, basic and diluted | $(0.11) | $(0.05) | $(0.25) | $(0.11) |
For the nine months, service revenue rose 11.0% to $6.10 million, while product revenue declined 13.2% to $3.64 million. Q3 service revenue increased 24.4%, but product revenue fell 42.4%. The Company reported no income-tax benefit or provision; tax benefits from losses were fully reserved.
At September 30, cash and cash equivalents were $492,734, total assets $9.46 million, and total liabilities $8.30 million. Working capital was negative $322,458, versus positive $4.08 million at December 31, 2012. Current liabilities were $8.12 million. Related-party demand notes payable totaled $2.54 million; the Company had also drawn $1.20 million under a related-party revolving credit agreement. Cash used in operating activities was $1.47 million for the nine months, compared with $3.55 million in 2012.
Material changes and unusual items
- Nine-month gross margin contracted to 31.0% from 41.1%. Management attributed the decline mainly to an approximately $300,000 anticipated loss on a turnkey project and sales of certain Ilios promotional units below cost.
- The nine-month operating loss included $320,924 of costs from an aborted public offering, expensed because no equity was raised. Higher operating expenses also reflected internal R&D, selling activity, public-company costs and financing activities.
- On January 9, 2013, Tecogen acquired generator-related assets for $497,800, including $240,000 of identified intangible assets and $40,870 of goodwill.
- Inventory increased to $4.34 million from $3.36 million, which management said supported production for backlog and tightened working capital. Accounts payable increased to $2.90 million from $1.15 million.
- The CEO personally pledged support for a $1.055 million bank credit facility backing guarantees on certain construction contracts. Operating-lease commitments totaled $5.48 million through 2024.
Outlook, liquidity and risks
As of November 4, 2013, reported product and installation backlog was $10.5 million: $6.5 million in purchase orders and $4.0 million in projects with completed customer approvals, allocated resources and firm verbal commitments. Management expected approximately 47% to be recognized as revenue in Q4 2013, while cautioning that backlog is not necessarily indicative of future performance. This is an expectation, not formal earnings guidance.
Management stated that existing resources, including the credit line and operating cash flows, should meet short-term working-capital needs, but said additional equity capital would be needed to support future growth. From October 16 through November 14, 2013, 60 accredited investors purchased shares for aggregate proceeds of $3,349,700. Separately, the Company borrowed $450,000 from its CEO on October 3 at 6% interest. The revolving credit agreement with the CEO had a $1.5 million limit, matured March 31, 2014, and bore interest at prime plus 1.5%.
Management reported material weaknesses in disclosure controls and internal control over financial reporting, citing insufficient accounting expertise for complex reporting and limited IT general-control staffing. Controls were deemed ineffective as of September 30, and no remediation changes had yet been made. Other key risks include ongoing losses, negative working capital, dependence on related-party financing, the need for further capital, project execution and margin risk, and reliance on customer and project timing. Tecogen also noted seasonal patterns in heating, cooling and service demand.
Important facts for investors to verify
- Whether the post-quarter private placement proceeds and subsequent CEO borrowing materially improve liquidity, and the Company’s funding needs as the credit agreement approaches maturity.
- Conversion of the $90,967 related-party debenture into shares on October 18, 2013, and the resulting share-count and dilution effects.
- Conversion of reported backlog into firm orders, shipments, revenue and cash collections, including the expected Q4 recognition percentage.
- Progress, expected cost and timing of remediation for the disclosed material weaknesses in financial reporting controls.
- Final profitability and cash exposure on the turnkey project, and whether the anticipated loss or below-cost promotional sales recur.
- Terms and business effects of the November 12 amendments to the agreements with American DG Energy, a related party; related-party balances and transactions warrant particular scrutiny.