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TGEN > SEC Filings for TGEN > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for TECOGEN INC.

Form 10-Q for TECOGEN INC.


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking statements are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements include, among other things, statements regarding our current and future cash requirements, our expectations regarding suppliers of cogeneration units, and statements regarding potential financing activities in the future. While the Company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the Company's estimates change and readers should not rely on those forward-looking statements as representing the Company's views as of any date subsequent to the date of the filing of this Quarterly Report. There are a number of important factors that could cause the actual results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Risk Factors" in this Quarterly Report.

Overview

Tecogen designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water, and air conditioning using automotive engines that have been specially adapted to run on natural gas. In some cases, our customers may choose to have the Company engineer and install the system for them rather than simply purchase the cogeneration and/or chiller units, which we refer to as "turnkey" projects. Cogeneration systems are efficient because in addition to supplying mechanical energy to power electric generators or compressors - displacing utility supplied electricity - they provide opportunity for the facility to incorporate the engine's waste heat into onsite processes such as space and potable water heating. We produce standardized, modular, small-scale products, with a limited number of product configurations that are adaptable to multiple applications. We refer to these combined heat and power products as CHP (electricity plus heat) and MCHP (mechanical power plus heat).

Results of Operations

Second quarter of 2013 Compared to Second quarter of 2012

Revenues

Revenues in the second quarter of 2013 were $2,803,460 compared to $3,384,900 in for the same period in 2012, a decrease of $581,440 or 17.2%. This decrease is due to a decrease in the volume of product shipments during the period. Product revenues in the second quarter of 2013 were $807,854 compared to $1,347,719 for the same period in 2012, a decrease of $539,865 or 40.1%. This decrease from the three months ended June 30, 2012 to June 30, 2013 was the aggregate of a decrease in cogeneration sales of $179,934 and a decrease in chiller sales of $359,931. Our product mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales. As a result, such fluctuation is expected.

Service revenues in the second quarter of 2013 were $1,995,606 compared to $2,037,181 for the same period in 2012, a slight decrease of $41,575 or 2.0%. Our service operation grows along with sales of cogeneration and chiller systems since the majority of our product sales are accompanied by a service contract or time and materials agreement. As a result our "fleet" of units being serviced by our service department naturally grows with product sales.

Cost of Sales

Cost of sales in the second quarter of 2013 was $1,989,587 compared to $1,997,402 for the same period in 2012 a decrease of $7,815, or 0.4%. During the second quarter of 2013 our overall gross profit margin was 29.0% compared to 41.0% for the same period in 2012, a decrease of 12.0%. The decrease in overall gross margin is attributable to the recognition of expected loss on certain turnkey projects in process as well as the sale of certain promotional Ilios units at below cost.

Contract Research and Development

Contract research and development income, which is classified as an offset to applicable expenses, for the three months ended June 30, 2013 and June 30, 2012 was $38,900 and $15,500, respectively, an increase of $23,400 due to increased activity on the grant.


Table of Contents
TECOGEN INC.

Operating Expenses

Our general and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. Our general and administrative expenses in the second quarter of June 30, 2013 were $1,679,282 compared to $1,673,002 for the same period in 2012, an increase of $6,280 or 0.4%. This increase was due to an overall increase in operating costs attributable to being a newly public company and financing activities.

Our selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Our selling expenses for the second quarter of 2013 were $286,101 compared to $197,608 for the same period in 2012, an increase of $88,493 or 44.8%. This increase is due to the increase in costs associated with trade shows, commissions and royalties during the second quarter of 2013 as compared to the same period in 2012.

Loss from Operations

Loss from operations for the second quarter of 2013 was $1,151,510 compared to $483,112 for the same period in 2012. The increase in the loss of $668,398 was due to the increase in cost of sales and operating expenses discussed above.

Other Income (Expense), net

Other expense, net for the three months ended June 30, 2013 was $33,796 compared to $4,408 for the same period in 2012. Other income (expense) includes interest income and other income of $2,591, net of interest expense on notes payable of $36,387 for the second quarter of 2013. For the same period in 2012, interest and other income was $13,394 and interest expense was $17,802. The decrease in interest income of $10,803 is the result of short-term investments held during the second quarter of 2012 that were not held during the second quarter of 2013. The increase in interest expense of $18,585 was mainly due to $300,000 of demand notes payable issued during the fourth quarter of 2012.

Provision for Income Taxes

The Company did not record any benefit or provision for income taxes for the three months ended June 30, 2013 and 2012, respectively. As of June 30, 2013 and 2012, the income tax benefits generated from the Company's net losses have been fully reserved.

Noncontrolling Interest

The noncontrolling interest share in the losses of Ilios was $94,826 for the three months ended June 30, 2013 compared to $90,547 for the same period in 2012, an increase of $4,279 or 4.7%. The increase was due to an increase in selling costs that Ilios incurred in the second quarter of 2013 associated with bringing the product to market. Noncontrolling interest ownership percentage as of June 30, 2013 and 2012 was 35.0% and 37.6%, respectively. Shares of restricted common stock issued under Ilios's equity compensation plan, but which have not yet vested, have not been included in calculating the noncontrolling interest ownership percentage.

First six months of 2013 Compared to First six months of 2012

Revenues

Revenues in the first six months of 2013 were 6,849,778 compared to 6,637,428 in for the same period in 2012, an increase of $212,350 or 3.2%. This increase is partially due to an increase in the volume of product shipments during the period. Product revenues in the first six months of 2013 were $2,860,519 compared to $2,837,426 for the same period in 2012, an increase of $23,093 or 0.8%. This increase from the six months ended June 30, 2012 to June 30, 2013 was the aggregate of an increase in cogeneration sales of $515,972 and a decrease in chiller sales of $492,879. Our product mix, as well as product revenue, can vary significantly from period to period as our products are high dollar, low volume sales. As a result, such fluctuation is expected.

Service revenues in the first six months of 2013 were $3,989,259 compared to $3,800,002 for the same period in 2012, an increase of $189,257 or 5.0%. Our service operation grows along with sales of cogeneration and chiller systems since the majority of our product sales are accompanied by a service contract or time and materials agreement.


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TECOGEN INC.

Cost of Sales

Cost of sales in the first six months of 2013 was $4,923,941 compared to $3,835,375 for the same period in 2012 a increase of $1,088,566, or 28.4%. During the first six months of 2013 our overall gross profit margin was 28.1% compared to 42.2% for the same period in 2012, a decrease of 14.1%. The decrease in overall gross margin is attributable to the recognition of an anticipated future loss of approximately $300,000 on a turnkey project in process as well as the sale of certain Ilios promotional units at below cost.

Contract Research and Development

Contract research and development income, which is classified as an offset to applicable expenses, for the six months ended June 30, 2013 and June 30, 2012 was $106,000 and $81,500, respectively, an increase of $24,500.

Operating Expenses

Our general and administrative expenses consist of executive staff, accounting and legal expenses, office space, general insurance and other administrative expenses. Our general and administrative expenses in the first six months of 2013 were $3,470,985 compared to $3,357,746 for the same period in 2012, an increase of $113,239 or 3.4%. This increase was due to internal research and development costs incurred of $156,000 as well as an overall increase in operating costs attributable to being a newly public company and financing activities.

Our selling expenses consist of sales staff, commissions, marketing, travel and other selling related expenses. Our selling expenses for the first six months of 2013 was $565,471 compared to $465,537 for the same period in 2012, an increase of $99,934 or 21.5%. This increase is due to the increase in costs associated with trade shows, commissions and royalties during the first six months of 2013 as compared to the same period in 2012.

Loss from Operations

Loss from operations for the first six months of 2013 was $2,110,619 compared to $1,021,230 for the same period in 2012. The increase in the loss of $1,089,389 was due to the increase in cost of sales and operating expenses discussed above.

Other Income (Expense), net

Other expense, net for the six months ended June 30, 2013 was $53,227 compared to $7,438 for the same period in 2012. Other income (expense) includes interest income and other income of $6,537, net of interest expense on notes payable of $59,764 for the first quarter of 2013. For the same period in 2012, interest and other income was $28,166 and interest expense was $35,604. The decrease in interest income of $21,629 is the result of short-term investments held during the first six months of 2012 that were not held during the first six months of 2013. The increase in interest expense of $24,160 was mainly due to $300,000 of demand notes payable issued during the fourth quarter of 2012.

Provision for Income Taxes

The Company did not record any benefit or provision for income taxes for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013 and 2012, the income tax benefits generated from the Company's net losses have been fully reserved.

Noncontrolling Interest

The noncontrolling interest share in the losses of Ilios was $212,973 for the six months ended June 30, 2013 compared to $193,382 for the same period in 2012, an increase of $19,591 or 10.1%. The increase was due to an increase in selling costs that Ilios incurred in the first six months of 2013 associated with bringing the product to market. Noncontrolling interest ownership percentage as of June 30, 2013 and 2012 was 35.0% and 37.6%, respectively. Shares of restricted common stock issued under Ilios's equity compensation plan, but which have not yet vested, have not been included in calculating the noncontrolling interest ownership percentage.


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TECOGEN INC.

Liquidity and Capital Resources

Consolidated working capital at June 30, 2013 was $1,205,612, compared to $4,078,704 at December 31, 2012, a decrease of $2,873,092. Included in working capital were cash and cash equivalents of $269,817 at June 30, 2013, compared to $1,572,785 in cash and cash equivalents and $181,859 in short-term investments at December 31, 2012. The decrease in working capital is due to increased operating expenses, increases in inventory, property and equipment, intangible assets, inventory and unbilled revenue from turnkey projects as well as the lack of any financing activities during the period.

Cash used in operating activities for the six months ended June 30, 2013 was $675,855 compared to $2,185,941 for the same period in 2012. Our accounts receivable balance decreased to $1,901,256 at June 30, 2013 compared to $2,700,243 at December 31, 2012, using $798,987 of cash due to timing of billing, shipments and collections. unbilled revenue increased by $107,545 as of June 30, 2013 compared to December 31, 2012, using $107,545 of cash due to timing of billing on our turnkey projects. Our inventory increased to $3,730,668 as of June 30, 2013 compared to $3,356,622 as of December 31, 2012, using $374,046 of cash to purchase inventory to build modules in backlog.

As of August 9, 2013, the Company's backlog of product and installation projects (and excluding service contracts) was $9.7 million. We expect approximately 68% of this backlog will be recognized as revenue in the final half of 2013. Our inventory balances have increased to support production demands, tightening available working capital. As discussed below, we have drawn upon our working capital line of credit in the third quarter of 2013 to support this activity as needed.

Accounts payable increased to $1,667,587 as of June 30, 2013 from $1,151,010 at December 31, 2012, providing $516,577 in cash to purchase inventory. Accrued expenses increased to $1,014,495 as of June 30, 2013 from $807,922 as of December 31, 2012, providing $206,573 of cash for operations.

During the first six months of 2013 our investing activities used $626,763 of cash and included purchases of property and equipment of $114,767 and expenditures related to intangible assets of $196,257 and goodwill of $40,870.

At June 30, 2013 our commitments included various leases for office and warehouse facilities of $5,631,846 to be paid over several years through 2024. The source of funds to fulfill these commitments will be provided from cash balances, operations or through debt or equity financing.

On March 14, 2013 the Company received a prepayment for purchases of modules, parts and service to be made by American DG Energy in the amount of $827,747. The Company provides a discount on these prepaid purchases equal to 6% per annum on deposit balances. The 6% discount is recorded as interest expense in the accompanying statements of operations. As of June 30, 2013 the outstanding balance on this prepayment was $614,789 and is included in due to related party, net of amounts receivable but not yet due from American DG Energy, in the accompanying condensed consolidated balance sheet.

On March 25, 2013, the Company entered into a Revolving Line of Credit Agreement, or the Credit Agreement, with John N. Hatsopoulos, our Chief Executive Officer. Under the terms of the Credit Agreement, Mr. Hatsopoulos has agreed to lend the Company up to an aggregate of $1,000,000, from time to time, at the written request of the Company. Any amounts borrowed by the Company pursuant to the Credit Agreement will bear interest at the Bank Prime Rate as quoted from time to time in the Wall Street Journal plus 1.5% per year. On August 13, 2013, the Company and Mr. Hatsopoulos agreed to increase the amount that may be outstanding under the Credit Agreement to $1,500,000. Repayment of the principal amount borrowed, together with accrued interest, pursuant to the Credit Agreement will be due on March 31, 2014, or the Maturity Date. Prepayment of any amounts due under the Credit Agreement may be made at any time without penalty, provided that prepayment of interest may not be made prior to January 1, 2014. The Credit Agreement terminates on the Maturity Date. As of August 13, 2013 the Company has borrowed $650,000 pursuant to the Credit Agreement at an interest rate of 4.75%.

Based on our current operating plan, we believe existing resources, including our line of credit and cash and cash flows from operations, will be sufficient to meet our working capital requirements for the next twelve months. As we continue to grow our business, our cash requirements may increase. As a result, we may need to raise additional capital through a debt financing or an equity offering to meet our operating and capital needs for future growth.

Our ability to continue to access capital could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us. If these conditions continue and we cannot raise funds through a public or private debt financing, or an equity offering, our ability to grow our business may be negatively affected and we may need to suspend and significantly reduce our operating costs until market conditions improve.


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TECOGEN INC.

Significant Accounting Policies and Critical Estimates

The Company's significant accounting policies are discussed in the Notes to the Condensed Consolidated Financial Statements above and in our 2012 Annual Report. The accounting policies and estimates that can have a significant impact upon the operating results, financial position and footnote disclosures of the Company are described in the above notes and in our Annual Report.

Seasonality

We expect that the majority of our heating systems sales will be in the winter and the majority of our chilling systems sales will be in the summer. Our cogeneration and chiller system sales are not generally affected by the seasons, although customer goals will be to have chillers installed and running in the spring. Our service team does experience higher demand in the warmer months when cooling is required. These units are generally shut down in the winter and started up again in the spring. This "busy season" for the service team generally runs from May through the end of September.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, including any outstanding derivative financial statements, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

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