TECOGEN INC. — Q3 2015 Form 10-Q
Business and period: Tecogen designs, manufactures and supports natural-gas-fueled combined heat and power systems, chillers and related services. This unaudited report covers the three and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless noted. The company reports one business segment and consolidates its 65%-owned Ilios subsidiary.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4.68 million | $4.18 million | $17.16 million | $12.93 million |
| Gross profit | $1.67 million | $1.09 million | $6.03 million | $3.86 million |
| Gross margin | 35.7% | 26.1% | 35.2% | 29.9% |
| Operating loss | $0.92 million | $1.46 million | $1.86 million | $3.72 million |
| Net loss attributable to Tecogen | $0.95 million | $1.45 million | $1.93 million | $3.72 million |
| Loss per share, basic and diluted | $0.06 | $0.09 | $0.12 | $0.25 |
Revenue mix and changes: Q3 product revenue rose 70.0% to $1.86 million, driven by cogeneration sales; service revenue fell 8.6% to $2.82 million, mainly due to lower installation activity. For the first nine months, product revenue increased 73.2% to $8.74 million and services increased 6.8% to $8.42 million. Management attributed improved gross margins and reduced operating losses to higher sales volume. Nine-month G&A rose 10.3% to $5.94 million; R&D declined 31.3% to $0.61 million, primarily reflecting project timing.
Cash, liquidity and capital
- Cash and cash equivalents were $3.97 million at September 30, 2015, versus $1.19 million at year-end 2014; restricted short-term investments were $0.29 million. Working capital was $11.91 million, up from $7.22 million.
- Operating activities used $3.35 million of cash in the first nine months, compared with $3.80 million in the prior-year period. Investing activities used $0.14 million; financing activities provided $6.28 million.
- Financing included $5.92 million net proceeds from common stock sales and $0.36 million from option exercises. In August, Tecogen sold 1.25 million shares to Seashell Limited for $5.00 million gross proceeds at $4.00 per share.
- Long-term debt included a $3.00 million senior convertible note to Michaelson Capital, bearing 4% interest and due December 31, 2016 if not converted. The August equity sale reduced its conversion price to $4.80. A related-party credit facility of up to $2.00 million at 6% was available, but no amounts had been drawn as of quarter-end.
- Backlog, excluding service contracts, was $10.56 million: $3.06 million in purchase orders and $7.50 million in projects with completed customer internal approvals and firm verbal commitments. The filing cautions that backlog may not predict future performance and its definition may differ from other companies’.
Outlook, risks and notable items
- Management expects sales-volume growth to continue supporting gross-margin improvement and expects inventory not to vary significantly from year-end levels. No quantified revenue or earnings guidance is provided.
- Q3 and nine-month 2015 revenue included $747,328 recorded under bill-and-hold arrangements; there were no such revenues in the comparable 2014 period. The filing describes the recognition criteria but provides no further transaction-specific detail here.
- A $294,728 restricted cash balance remained as collateral/retainage related to a performance bond for an installation project.
- Management concluded disclosure controls were ineffective due to material weaknesses: insufficient accounting expertise for complex GAAP and reporting matters, and limited staffing for IT general controls. No remediation changes had been made by September 30; management said it planned to address the weaknesses as resources became available.
- The company remains loss-making and used operating cash. Seasonality affects service demand, which is generally busiest from May through September. The filing states there were no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue growth and margin gains are sustainable, particularly given the bill-and-hold revenue and the composition and conversion of backlog.
- Cash runway and operating cash use, including working-capital needs as inventory and unbilled revenue change.
- Terms, conversion dilution and repayment capacity for the $3.00 million convertible note, and any future use of the related-party credit facility.
- Progress in remediating the disclosed material weaknesses in financial reporting and IT controls.
- Whether the performance-bond collateral is released as projects are completed and retainage requirements decline.