TECOGEN INC. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Tecogen designs, manufactures and services natural-gas-fueled combined heat and power systems, chillers and related equipment. The company reports one business segment.
Financial performance
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $6.85 million | $5.08 million; up 34.9% |
| Gross profit / margin | $2.91 million / 42.6% | $1.72 million / 33.9% |
| Operating income (loss) | $77,702 | $(906,866) |
| Net income (loss) attributable to Tecogen | $44,787 | $(893,168) |
| Diluted earnings (loss) per share | $0.00 | $(0.05) |
| Cash used in operating activities | $1.55 million | $1.15 million |
| Cash and cash equivalents | $2.15 million at March 31, 2017 | $3.72 million at December 31, 2016 |
| Working capital | $14.54 million | $14.44 million at December 31, 2016 |
Product revenue rose 23.9% to $2.81 million, reflecting higher cogeneration sales partly offset by lower chiller and heat-pump sales. Service revenue rose 43.8% to $4.04 million, primarily from increased installations and service-contract revenue. Total operating expenses increased 8.0% to $2.84 million. No income tax provision or benefit was recorded.
Operating cash use included increases in accounts receivable and inventory. Inventory increased by $1.30 million, primarily due to a January purchase of used equipment from related party American DG Energy for approximately $985,000; Tecogen planned to resell the equipment in coming quarters. Investing activities used $126,938, and option exercises provided $106,835 in financing cash flow.
Balance sheet, debt and liquidity
At March 31, 2017, total assets were $24.42 million and total liabilities were $9.71 million. Current assets were $20.61 million against current liabilities of $6.07 million. The company reported a $3.15 million related-party senior convertible note, bearing 4% interest and due December 28, 2018. A separate related-party credit facility of up to $2 million, with a $250,000 quarterly draw limit and 6% interest, had not been drawn; its stated maturity was July 1, 2017.
Material changes, outlook and notable items
- Management attributed the gross-margin improvement to product upgrades and improvements, and expected sales-volume growth to maintain the margin. This is management’s stated expectation, not formal earnings guidance.
- Management reported a $14 million backlog of product and installation projects, excluding service contracts: $5 million in purchase orders and $9 million in projects with completed customer approvals, allocated financing and firm verbal commitments. The filing cautions that backlog is not necessarily indicative of future performance and may not be comparable with other companies’ measures.
- Q1 included $1.14 million of revenue recognized as bill-and-hold transactions, compared with $140,600 in Q1 2016. The filing describes the criteria applied to these arrangements.
- The proposed merger with American DG Energy remained subject to shareholder approval and other closing conditions. Two shareholder lawsuits challenged the merger process, exchange ratio and disclosures; Tecogen said it believed the cases were not material to its financial statements. The filing describes the actions as being in their early stages.
- Management disclosed that disclosure controls and procedures were not effective because of material weaknesses involving insufficient accounting expertise for complex reporting and limited personnel overseeing IT general controls. No changes to the remediation process were made during the quarter; management said it planned to address the weaknesses as resources became available.
- The company expected seasonal demand patterns, including higher service-team demand from May through September. It reported no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether reported bill-and-hold revenue met the company’s stated recognition criteria, and whether backlog projects convert to orders and revenue.
- Whether the inventory purchased from American DG Energy is resold as planned, and the timing of related working-capital needs and cash collections.
- Cash burn, receivables and liquidity trends, including the status of the undrawn related-party credit facility and the convertible note’s maturity and conversion terms.
- Outcome and potential implications of the proposed American DG merger and related shareholder litigation.
- Progress in remediating the disclosed material weaknesses in financial reporting and IT controls.