TECOGEN INC. — Q1 2013 Form 10-Q
Business and period: Tecogen designs, manufactures and supports natural-gas-fueled combined heat and power systems, chillers and advanced heating products. This unaudited report covers the three months ended March 31, 2013, compared with Q1 2012; the company operates as one segment and consolidates its 65%-owned subsidiary, Ilios.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $4.05 million | $3.25 million; up 24.4% |
| Product revenue | $2.05 million | $1.49 million; up 37.8% |
| Service revenue | $1.99 million | $1.76 million; up 13.1% |
| Gross profit / margin | $1.11 million / 27.5% | $1.41 million / 43.5% |
| Operating loss | $959,109 | $538,118 |
| Consolidated net loss | $978,540 | $541,148 |
| Net loss attributable to Tecogen | $860,393; $0.02 per share | $438,313; $0.01 per share |
| Cash used in operating activities | $255,716 | $1,770,870 per cash flow statement |
| Cash and short-term investments, March 31 | $862,737 | Cash was $1,572,785 at Dec. 31, 2012; investments were $181,859 |
| Working capital, March 31 | $2.58 million | $4.08 million at Dec. 31, 2012 |
Cost of sales rose 59.7%, faster than revenue, reducing gross margin. Management attributed the margin decline primarily to an approximately $300,000 anticipated loss on a turnkey project and sales of certain Ilios promotional units below cost. General and administrative expense increased 6.3%, including $76,580 of internal R&D costs and costs associated with being newly public. No income-tax benefit was recorded because tax benefits were fully reserved.
Cash used in investing was $636,393, including $313,002 for property and equipment and $323,391 for intangible assets. Cash declined by $892,109 during the quarter to $680,676. At quarter-end, total liabilities were $5.51 million, including $1.34 million of demand notes payable to related parties, $90,967 of related-party convertible debentures and $760,535 due to a related party. The demand notes are due upon demand and bear 5%–6% interest; the CEO holds $1.30 million. The debentures are due September 24, 2013. A $1 million related-party credit line from the CEO, bearing prime plus 1.5% and due March 31, 2014, was undrawn at quarter-end.
Changes, outlook and risks
- Revenue growth reflected higher cogeneration sales and service revenue; chiller sales declined. Management cautioned that high-dollar, low-volume product sales can cause significant period-to-period fluctuations.
- In January, Tecogen acquired tangible and intangible assets used to manufacture the InVerde generator for $497,500. Purchase-price allocation remained preliminary.
- Management said existing resources, including the credit line and cash flows from operations, were expected to meet working-capital needs for the next 12 months. It also warned that growth may require additional debt or equity financing and that inability to raise funds could constrain growth or require cost reductions. No quantified revenue or earnings guidance was provided.
- Operating risks include customer billing and collection timing, turnkey project execution and estimates, seasonal demand, and reliance on external financing. Operating lease commitments totaled $5.76 million through 2024.
- Related-party arrangements are significant: American DG Energy prepaid $827,747 for future 2013 purchases, with $826,822 outstanding at quarter-end and a 6% annual discount on deposit balances. Tecogen also disclosed sales and service dealings with this affiliate.
- Management reported disclosure controls and internal control over financial reporting were ineffective due to material weaknesses involving accounting expertise and limited IT general-control staffing. No remediation changes had been made by March 31.
- The filing states no off-balance-sheet arrangements and no additional subsequent events requiring disclosure.
Important facts for investors to verify
- Reconcile the MD&A cash-flow comparison, which states Q1 2012 operating cash use of $1,788,672, with the cash-flow statement’s $1,770,870 figure.
- Track cash conversion, receivables, unbilled turnkey costs and working capital, as these contributed to liquidity use and the decline in working capital.
- Monitor the turnkey project loss estimate, promotional-unit margins and whether gross margin recovers.
- Confirm repayment or refinancing plans for demand notes due on demand and convertible debentures due September 2013, and whether the CEO credit line is drawn.
- Assess the final asset valuation for the InVerde acquisition and progress toward remediating the disclosed control weaknesses.