TECOGEN INC. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 6, 2015. Tecogen designs, manufactures, installs, and services natural-gas-fueled combined heat and power, chiller, and heating systems. The unaudited consolidated statements include 65%-owned Ilios Inc.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $6.38 million | $4.54 million | $12.49 million | $8.76 million |
| Gross profit | $2.14 million | $1.35 million | $4.37 million | $2.77 million |
| Gross margin | 33.5% | 29.7% | 35.0% | 31.7% |
| Operating loss | $(0.30) million | $(1.22) million | $(0.93) million | $(2.28) million |
| Net loss attributable to Tecogen | $(0.36) million | $(1.23) million | $(0.98) million | $(2.27) million |
| Loss per share, basic and diluted | $(0.02) | $(0.08) | $(0.06) | $(0.15) |
Revenue mix and change: Q2 product revenue rose 66.6% to $3.35 million, led by cogeneration sales; service revenue increased 20.0% to $3.04 million. For the first half, product revenue grew 74.1% to $6.88 million and service revenue grew 16.7% to $5.60 million. Management attributed service growth to installation activity and service contracts.
Cash flow and liquidity: First-half cash used in operating activities was $842,266, compared with $2.92 million used in 2014. Investing activities used $91,147; financing activities provided $1.36 million. Cash and cash equivalents were $1.61 million at June 30, versus $1.19 million at year-end; restricted short-term investments were $294,655. Working capital was $7.88 million, up from $7.22 million at December 31, 2014. The company attributed the improvement primarily to common-stock sales. First-half operating cash flow also reflected changes in working capital, including increased unbilled revenue and deferred revenue.
Debt and other financial items: The balance sheet includes a $3.0 million senior convertible note payable to Michaelson Capital, bearing 4% interest and due December 31, 2016 unless converted. A new related-party credit agreement with co-CEO John Hatsopoulos permits up to $2.0 million in borrowing at 6%; no amounts had been drawn as of the filing. The company reported no income-tax benefit or provision; tax benefits from losses were fully reserved.
Material changes, outlook, and risks
- Revenue growth and improved gross margins substantially reduced operating losses year over year, though Tecogen remained loss-making. Operating expenses for the first half increased 11.0% in general and administrative costs, which management linked to public-company operations; research and development expense declined with project timing.
- Management said it expects higher sales volume to continue improving gross margins. The filing provides no specific earnings, revenue, or cash-flow guidance. It notes seasonal patterns in heating, cooling, and service demand.
- Backlog at June 30 was reported as $9.32 million, excluding service contracts. It included purchase orders and projects with completed customer approval, allocated funding, and firm verbal commitments; management cautioned backlog is not necessarily indicative of future performance.
- After quarter-end, Tecogen sold 1.25 million shares to Seashell Limited for $5.0 million, or $4.00 per share, in a private placement. A resale registration statement was to be filed. This is a subsequent event, not June 30 cash.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses: insufficient accounting personnel with experience in complex GAAP reporting and limited staffing for IT general controls. The company said no remediation changes had been made as of June 30 and planned to address the weaknesses as resources became available.
- Performance bonds may be drawn if Tecogen fails to complete projects as contracted. During the quarter, some collateral requirements were reduced and restricted cash was released; a CEO-backed $1.055 million letter of credit was canceled in April 2015.
- The filing describes related-party financing and transactions with affiliated companies. It also states interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether revenue growth, gross-margin improvement, and the reported backlog convert into sustained profitable operations and positive operating cash flow.
- The terms, timing, and use of proceeds from the $5.0 million post-quarter private placement, including registration of the resale shares and resulting dilution.
- Liquidity needs and any future borrowing under the $2.0 million related-party credit line; the $3.0 million convertible note’s maturity, conversion, and repayment terms.
- Progress in remediating the disclosed financial-reporting and IT-control material weaknesses.
- Project completion, customer collections, unbilled revenue, and performance-bond obligations, including the composition and conversion status of backlog.